**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q/A**

**(AmendmentNo. 1)**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended June 30, 2004**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from             to             **

**COMMISSIONFILE NUMBER 000-29661**

**UTSTARCOM, INC.**

(Exact name of registrantas specified in its charter)

| DELAWARE                                                                           | **52-1782500**                       |
|------------------------------------------------------------------------------------|--------------------------------------|
| (State of Incorporation)                                                           | (I.R.S. Employer Identification No.) |
| **1275  HARBOR BAY PARKWAY  ALAMEDA, CALIFORNIA**                                  | **94502**                            |
| (Address of principal executive offices)                                           | (zip code)                           |
| Registrant’s  telephone number, including area code: **(510)  864-8800** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes  x  No  o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act of 1934). Yes  x  No  o

As of June 30, 2004there were 113,912,641 shares of the registrant’s common stock outstanding,par value $0.00125

 

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**EXPLANATORY NOTE**

UTStarcom , Inc. (the “Company”) originally filedits quarterly report on Form 10-Q for the period ended June 30, 2004with the Securities and Exchange Commission (the “SEC”) on August 16, 2004(the “Original Filing”). This Amendment No. 1 on Form 10-Q/A (“AmendmentNo. 1”) to the Original Filing is being filed to reflect the adjustmentsand restatement of its condensed consolidated financial statements as of andfor the three and six months ended June 30, 2004 and June 30, 2003for certain changes resulting from the 2003 restatement, as described below,and to reflect the adjustments to the December 31, 2003 consolidatedbalance sheet as presented in the Company’s amended Annual Report on Form 10-K/Afor the year ended December 31, 2003 as filed with the SEC on April 13,2005.

As part of the financial closing process for the yearended December 31, 2004, the Company identified certain prior year errorsresulting in a restatement which decreased the provision for income taxes andincreased net income by $20.7 million for the year ended December 31,2003. In addition, as a result of the correction of the tax provision, retainedearnings was increased by $20.7 million, additional paid-in capital wasincreased by $0.9 million, income taxes payable was decreased by $2.5 million,other long-term assets were increased by $21.6 million, prepaids were increasedby $2.8 million and other current assets were reduced by $5.3 million, all asof December 31, 2003. There was no net effect on cash provided fromoperating activities as a result of this error.

Theimpact of the restatement on each of the respective quarters in 2003 is asfollows (in thousands):
| ** **                                      | ** ** | **Decrease in Income  Tax Expense** | ** ** | **Decrease in Income  Tax Payable** | ** ** | **Increase in  Net Income** | ** ** | **Increase in  Diluted EPS** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| For the three months ended: |       |                                               |       |                                               |       |                                  |       |                                   |       |   |   |   |   |   |   |   |   |
| March 31,  2003                            |       |                                               | $          | 3,825                                              |       |                                  |       | $                                      | 3,825      |   |   |   | $ | 3,825 |   |   |   | $ | 0.04 |   |   |
| June 30,  2003                             |       |                                               | $          | 4,038                                              |       |                                  |       | $                                      | 4,038      |   |   |   | $ | 4,038 |   |   |   | $ | 0.03 |   |   |
| September 30, 2003                         |       |                                               | $          | 6,064                                              |       |                                  |       | $                                      | 6,064      |   |   |   | $ | 6,064 |   |   |   | $ | 0.04 |   |   |

 

During the evaluation of the errors related to theincome tax provision, the Company determined that an additionalreclassification of reported 2003 results was required. Specifically, cost ofsales and other income both increased by $3.5 million for the year ended December 31,2003 to properly classify certain incentive payments received for exports andvalue-added taxes in China. This adjustment related solely to the fourthquarter of 2003.

In addition to the errors in the 2003 tax provision,the Company had not correctly identified a related party that is deemed avariable interest entity and for whom the Company is considered the primarybeneficiary in accordance with FASB Interpretation No. 46 (“FIN 46”). TheCompany has corrected its 2003 financial statements to reflect theconsolidation of this variable interest entity, MDC Holding Limited (“MDCHolding”) and its affiliated entities (MDC Holding and such affiliated entitiesare referred to, collectively, as “MDC”). At December 31, 2003, thisconsolidation resulted in a $5.5 million increase in total assets and a $0.7million increase in total liabilities. There was no effect on net income as aresult of this consolidation. The consolidation occurred upon the Company’sadoption of FIN 46 at the beginning of the fourth quarter of 2003.

Furthermore, an impairment charge of $7.4 million, netof taxes of $1.3 million, was recorded to reflect an impairment of MDCequipment subject to a revenue share arrangement. Due to the uncertaintiessurrounding the customer’s subscriber income and ability to pay under thisarrangement, the Company determined that an impairment charge should have beenrecorded in the fourth quarter of 2003 when these conditions should have beenidentified. Accordingly, an impairment charge of $7.4 million, net of tax, wasrecorded, which decreased both total assets and equity by $7.4 million at December 31,2003. This adjustment was recorded in the fourth quarter of 2003.

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The Companyidentified certain revisions in classification during the preparation of the2003 restated financial statements. Therefore, for the consolidated financialstatements for the quarter ended June 30, 2004, the following adjustmentswere made to conform to the 2003 restated financial statements:

(1)         Cost of sales for relatedparty revenue transactions is presented separately from cost of sales fornon-related party revenue transactions for all periods presented;

(2)         A related party which is31% owned by an individual related to a member of the Company’s Board ofDirectors and associated transactions have been identified. See Note 19 to theConsolidated Financial Statements.

On April 13, 2005, the Company filed Amendment No. 1to its Annual Report on Form 10-K/A for the year ended December 31,2003 to reflect the restatement of its consolidated financial statements forthe year then ended and to disclose the impact on quarters ended March 31,2003, June 30, 2003 and September 30, 2003.

The results of operations for the year ended December 31,2004 and the results of operations for each of the quarters ended March 31,2004, June 30, 2004 and September 30, 2004 have not been impacted bythe restatement of 2003 financial results discussed above. However, thebeginning and ending balances of certain balance sheet accounts for the quartersof 2004 were affected and therefore have been adjusted in this Amendment No. 1to reflect the 2003 restatement.

Changes have been made tothe following items in this Amendment as a result of the 2003 restatement.

**Part I**

·       Item1.      Condensed Consolidated FinancialStatements

·       Item2.      Management’s Discussion andAnalysis of Financial Condition and Results of Operations

·       Item3.      Quantitative and QualitativeDisclosures about Market Risk

·       Item4.      Controls and Procedures

Amendment No. 1 does not reflect events that haveoccurred after the August 16, 2004 filing date of the Quarterly Report on Form 10-Qthat the Company originally filed with the SEC, or modify or update thedisclosures presented in the original Form 10-Q, except to reflectthe adjustments and restatement described above. Accordingly, this Form 10-Q/Ashould be read in conjunction with our filings with the SEC subsequent to thefiling of the original Form 10-Q.

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**TABLEOF CONTENTS**
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                           |       |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item  1.          | Condensed Consolidated  Financial Statements                                                                                        | 4          |
|              | Condensed Consolidated  Balance Sheets as of June 30, 2004 and December 31, 2003 (unaudited)                              | 4          |
|              | Condensed Consolidated  Statements of Operations for the three and six month periods ended  June 30, 2004 and 2003 (unaudited) | 5          |
|              | Condensed Consolidated  Statements of Cash Flows for the six month periods ended June 30, 2004  and 2003 (unaudited)           | 6          |
|              | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                                   | 7          |
| Item  2.          | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                         | 32         |
| Item  3.          | Quantitative and Qualitative  Disclosures about Market Risk                                                                         | 64         |
| Item 4.           | Controls and Procedures                                                                                                             | 65         |
| **PART II.** | **OTHER INFORMATION**                                                                                                               | ** ** |
| Item 1.           | Legal Proceedings                                                                                                                   | 73         |
| Item  2.          | Changes in Securities, Use  of Proceeds and Issuer Purchases of Equity Securities                                                   | 74         |
| Item  3.          | Defaults Upon Senior  Securities                                                                                                    | 74         |
| Item  4.          | Submission of Matters to a  Vote of Security Holders                                                                                | 74         |
| Item 5.           | Other Information                                                                                                                   | 74         |
| Item  6.          | Exhibits and Reports on  Form 8-K                                                                                              | 75         |
|              | Signatures                                                                                                                          |       |
|              | Exhibit Index                                                                                                                  |       |

 

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**PART I—FINANCIAL INFORMATION**

**ITEM1—CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**UTSTARCOM, INC.CONDENSED CONSOLIDATEDBALANCE SHEETS (UNAUDITED)(In thousands, except share and per share data)**
| ** **                                                                                                                                                                                  | ** ** | **June 30,  2004**   | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **(As Restated)(2)** | ** ** | **(As Restated)(1)**   | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                      |       |                        |       |   |   |   |   |
| Current assets:                                                                                                                                                                             |       |                      |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                   |       |                      | $          | 488,540                     |       |   |   | $ | 377,747 |   |   |
| Short-term investments                                                                                                                                                                      |       |                      | 76,979     |                        |       |   | 48,617 |   |   |
| Accounts receivable, net of allowances for doubtful accounts  of $40,317 and $31,172 at June 30, 2004 and December 31, 2003,  respectively                                   |       |                      | 509,975    |                        |       |   | 325,288 |   |   |
| Accounts receivable, related parties                                                                                                                                                        |       |                      | 29,884     |                        |       |   | 43,944 |   |   |
| Notes receivable                                                                                                                                                                            |       |                      | 43,392     |                        |       |   | 11,362 |   |   |
| Inventories                                                                                                                                                                                 |       |                      | 435,579    |                        |       |   | 257,065 |   |   |
| Deferred costs/Inventories at customer sites under  contracts                                                                                                                               |       |                      | 318,723    |                        |       |   | 542,060 |   |   |
| Prepaids                                                                                                                                                                                    |       |                      | 120,836    |                        |       |   | 139,103 |   |   |
| Restricted cash and short-term investments                                                                                                                                                  |       |                      | 42,633     |                        |       |   | 24,404 |   |   |
| Other current assets                                                                                                                                                                        |       |                      | 35,238     |                        |       |   | 48,499 |   |   |
| Total current assets                                                                                                                                                                        |       |                      | 2,101,779  |                        |       |   | 1,818,089 |   |   |
| Property, plant and equipment, net                                                                                                                                                          |       |                      | 226,972    |                        |       |   | 187,039 |   |   |
| Long-term investments                                                                                                                                                                       |       |                      | 24,504     |                        |       |   | 24,066 |   |   |
| Goodwill                                                                                                                                                                                    |       |                      | 113,429    |                        |       |   | 100,180 |   |   |
| Intangible assets, net                                                                                                                                                                      |       |                      | 64,191     |                        |       |   | 44,051 |   |   |
| Other long-term assets                                                                                                                                                                      |       |                      | 77,682     |                        |       |   | 70,625 |   |   |
| Total assets                                                                                                                                                                                |       |                      | $          | 2,608,557                   |       |   |   | $ | 2,244,050 |   |   |
| **LIABILITIES, MINORITY INTEREST  AND STOCKHOLDERS’ EQUITY**                                                                                                                           |       |                      |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                        |       |                      |       |                        |       |   |   |   |   |
| Accounts payable                                                                                                                                                                            |       |                      | $          | 389,040                     |       |   |   | $ | 251,122 |   |   |
| Income taxes payable                                                                                                                                                                        |       |                      | 25,591     |                        |       |   | 14,265 |   |   |
| Customer advances                                                                                                                                                                           |       |                      | 141,088    |                        |       |   | 450,499 |   |   |
| Deferred revenue                                                                                                                                                                            |       |                      | 49,493     |                        |       |   | 44,958 |   |   |
| Other current liabilities                                                                                                                                                                   |       |                      | 205,909    |                        |       |   | 173,911 |   |   |
| Total current liabilities                                                                                                                                                                   |       |                      | 811,121    |                        |       |   | 934,755 |   |   |
| Convertible subordinated notes                                                                                                                                                              |       |                      | 410,655    |                        |       |   | 410,655 |   |   |
| Total liabilities                                                                                                                                                                           |       |                      | 1,221,776  |                        |       |   | 1,345,410 |   |   |
| Commitments and  contingencies (Note 16)                                                                                                                                                    |       |                      |       |                        |       |   |   |   |   |
| Minority interest in consolidated subsidiaries                                                                                                                                              |       |                      | 5,396      |                        |       |   | 5,309 |   |   |
| Stockholders’ equity:                                                                                                                                                                  |       |                      |       |                        |       |   |   |   |   |
| Common stock: $0.00125 par value; authorized:  750,000,000 shares; issued and outstanding: 113,912,641 and 104,272,477 at  June 30, 2004 and December 31, 2003, respectively |       |                      | 143        |                        |       |   | 131 |   |   |
| Additional paid-in capital                                                                                                                                                                  |       |                      | 1,115,491  |                        |       |   | 654,483 |   |   |
| Deferred stock compensation                                                                                                                                                                 |       |                      | (7,315     | )                           |       |   | (7,761 | ) |   |
| Retained earnings                                                                                                                                                                           |       |                      | 268,666    |                        |       |   | 243,058 |   |   |
| Accumulated other comprehensive income                                                                                                                                                      |       |                      | 4,400      |                        |       |   | 3,420 |   |   |
| Total stockholders’ equity                                                                                                                                                             |       |                      | 1,381,385  |                        |       |   | 893,331 |   |   |
| Total liabilities,  minority interest and stockholders’ equity                                                                                                                         |       |                      | $          | 2,608,557                   |       |   |   | $ | 2,244,050 |   |   |

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(1)             See the Company’s filing onForm 10-K/A filed with the SEC.

(2)             See Note 24 to the condensed consolidated financialstatements.

See accompanying notes to condensed consolidated financial statements.

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**UTSTARCOM, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS (UNAUDITED)(In thousands, except per share data)**
| ** **                                                         | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                                            | ** ** | **2003**                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | ** **                                          | ** ** | ** (As Restated)(1) **             | ** ** | ** ** | ** ** | **(As Restated)(1)** | ** ** |
| Net sales                                                          |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Unrelated parties                                                  |       | $                                                   | 668,552    |                                              |       | $ | 345,684 |   |   | $ | 1,279,282 |   |   | $ | 617,687 |   |   |
| Related parties                                                    |       | 21,076                                              |       |                                              | 60,150     |   |   | 32,637 |   |   | 118,667 |   |   |
|                                                               |       | 689,628                                             |       |                                              | 405,834    |   |   | 1,311,919 |   |   | 736,354 |   |   |
| Cost of sales                                                      |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Unrelated parties                                                  |       | 505,247                                             |       |                                              | 246,891    |   |   | 946,772 |   |   | 442,529 |   |   |
| Related parties                                                    |       | 8,111                                               |       |                                              | 21,439     |   |   | 12,842 |   |   | 43,636 |   |   |
| Gross profit                                                       |       | 176,270                                             |       |                                              | 137,504    |   |   | 352,305 |   |   | 250,189 |   |   |
| Operating  expenses:                                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                |       | 67,830                                              |       |                                              | 34,963     |   |   | 134,773 |   |   | 72,546 |   |   |
| Research and development                                           |       | 52,592                                              |       |                                              | 36,078     |   |   | 98,250 |   |   | 62,890 |   |   |
| In-process research and development                                |       | 1,400                                               |       |                                              | 9,328      |   |   | 1,400 |   |   | 10,648 |   |   |
| Amortization of intangible assets                                  |       | 3,334                                               |       |                                              | 1,483      |   |   | 6,307 |   |   | 2,178 |   |   |
| Total operating  expenses                                          |       | 125,156                                             |       |                                              | 81,852     |   |   | 240,730 |   |   | 148,262 |   |   |
| Operating income                                                   |       | 51,114                                              |       |                                              | 55,652     |   |   | 111,575 |   |   | 101,927 |   |   |
| Interest income                                                    |       | 1,838                                               |       |                                              | 699        |   |   | 3,191 |   |   | 1,642 |   |   |
| Interest expense                                                   |       | (1,139                                              | )          |                                              | (2,210     | ) |   | (2,221 | ) |   | (2,849 | ) |   |
| Other income, net                                                  |       | 4,263                                               |       |                                              | 154        |   |   | 13,048 |   |   | 4,340 |   |   |
| Equity in loss of  affiliated companies                            |       | (1,201                                              | )          |                                              | (1,745     | ) |   | (2,198 | ) |   | (2,720 | ) |   |
| Income before  income taxes and minority interest                  |       | 54,875                                              |       |                                              | 52,550     |   |   | 123,395 |   |   | 102,340 |   |   |
| Income tax  expense                                                |       | 10,975                                              |       |                                              | 9,100      |   |   | 24,679 |   |   | 17,722 |   |   |
| Minority interest  in earnings (loss) of consolidated subsidiaries |       | (37                                                 | )          |                                              | —     |   |   | (87 | ) |   | — |   |   |
| Net income                                                         |       | $                                                   | 43,863     |                                              |       | $ | 43,450 |   |   | $ | 98,629 |   |   | $ | 84,618 |   |   |
| Basic earnings per share                                           |       | $                                                   | 0.39       |                                              |       | $ | 0.43 |   |   | $ | 0.86 |   |   | $ | 0.81 |   |   |
| Diluted earnings  per share                                        |       | $                                                   | 0.33       |                                              |       | $ | 0.36 |   |   | $ | 0.73 |   |   | $ | 0.72 |   |   |
| Weighted average shares used in per-share calculation:             |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| —Basic                                                        |       | 113,773                                             |       |                                              | 100,698    |   |   | 114,193 |   |   | 104,009 |   |   |
| —Diluted                                                      |       | 136,095                                             |       |                                              | 124,360    |   |   | 137,709 |   |   | 119,641 |   |   |

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(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

See accompanying notes to condensed consolidated financial statements.

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**UTSTARCOM, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands)**
| ** **                                                                     | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                          | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | **(As Restated)(2)**                         | ** ** | **(As Restated)(1)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |       |                                              |       |   |   |   |   |   |   |
| Net income                                                                     |       |                                              | $          | 98,629 |   |   |   | $ | 84,618 |   |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                                              |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                 |       |                                              | 33,988     |   |   |   | 17,729 |   |   |
| Non-qualified  stock option exercise tax benefits                              |       |                                              | 3,541      |   |   |   | 8,231 |   |   |
| Net loss on sale  of assets                                                    |       |                                              | 66         |   |   |   | 690 |   |   |
| In-process  research and development costs                                     |       |                                              | 1,400      |   |   |   | 10,648 |   |   |
| Amortization of  debt issuance costs                                           |       |                                              | 1,166      |   |   |   | 777 |   |   |
| Warrants  adjustment to fair value                                             |       |                                              | 32         |   |   |   | (158 | ) |   |
| Loss on sale of  investment                                                    |       |                                              | —     |   |   |   | 73 |   |   |
| Net loss on  long-term investments                                             |       |                                              | 469        |   |   |   | — |   |   |
| Stock compensation  expense                                                    |       |                                              | 245        |   |   |   | 3,074 |   |   |
| Provision for  doubtful accounts                                               |       |                                              | 9,485      |   |   |   | 1,123 |   |   |
| Inventory  provision                                                           |       |                                              | 15,853     |   |   |   | (8,105 | ) |   |
| Equity in loss of  affiliated companies                                        |       |                                              | 2,198      |   |   |   | 2,720 |   |   |
| Deferred income  taxes                                                         |       |                                              | (4,546     | ) |   |   | (1,686 | ) |   |
| Minority interest  in earnings of consolidated subsidiary                      |       |                                              | 87         |   |   |   | — |   |   |
| Changes in operating  assets and liabilities:                                  |       |                                              |       |   |   |   |   |   |   |
| Accounts  receivable                                                           |       |                                              | (179,074   | ) |   |   | (42,259 | ) |   |
| Inventories                                                                    |       |                                              | (192,985   | ) |   |   | (254,076 | ) |   |
| Deferred  costs/Inventories at customer sites under contracts                  |       |                                              | 223,337    |   |   |   | (405,853 | ) |   |
| Other current and  non-current assets                                          |       |                                              | 2,112      |   |   |   | (121,038 | ) |   |
| Accounts payable                                                               |       |                                              | 136,856    |   |   |   | 165,590 |   |   |
| Income taxes  payable                                                          |       |                                              | 11,326     |   |   |   | (15,985 | ) |   |
| Customer advances                                                              |       |                                              | (309,772   | ) |   |   | 9,188 |   |   |
| Deferred revenue                                                               |       |                                              | 4,493      |   |   |   | 362,240 |   |   |
| Other current  liabilities                                                     |       |                                              | 22,549     |   |   |   | 26,525 |   |   |
| Net cash used in  operating activities                                         |       |                                              | (118,545   | ) |   |   | (155,934 | ) |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |       |                                              |       |   |   |   |   |   |   |
| Additions to  property, plant and equipment                                    |       |                                              | (62,466    | ) |   |   | (41,192 | ) |   |
| Investment in  affiliates, net of cash acquired                                |       |                                              | (1,000     | ) |   |   | (1,000 | ) |   |
| Purchase of  businesses, net of cash acquired                                  |       |                                              | (44,711    | ) |   |   | (109,520 | ) |   |
| Proceeds from  disposal of property                                            |       |                                              | —     |   |   |   | 21 |   |   |
| Purchase of  intellectual property licenses                                    |       |                                              | (3,540     | ) |   |   | — |   |   |
| Change in  restricted cash                                                     |       |                                              | (8,677     | ) |   |   | (4,032 | ) |   |
| Purchase of  short-term investments                                            |       |                                              | (132,654   | ) |   |   | (37,307 | ) |   |
| Proceeds from sale  of short-term investments                                  |       |                                              | 97,369     |   |   |   | 150,278 |   |   |
| Net cash used in  investing activities                                         |       |                                              | (155,679   | ) |   |   | (42,752 | ) |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                          |       |                                              |       |   |   |   |   |   |   |
| Issuance of stock,  net of expenses                                            |       |                                              | 17,672     |   |   |   | 34,959 |   |   |
| Purchase of bond  hedge and call option                                        |       |                                              | —     |   |   |   | (43,792 | ) |   |
| Net proceeds from  borrowing                                                   |       |                                              | —     |   |   |   | 391,431 |   |   |
| Repurchase of  stock                                                           |       |                                              | (107,567   | ) |   |   | (139,609 | ) |   |
| Proceeds from  stockholder notes                                               |       |                                              | —     |   |   |   | 7 |   |   |
| Proceeds from  equity offering                                                 |       |                                              | 474,554    |   |   |   | — |   |   |
| Net cash provided  by financing activities                                     |       |                                              | 384,659    |   |   |   | 242,996 |   |   |
| Effect of exchange  rate changes on cash                                       |       |                                              | 358        |   |   |   | (276 | ) |   |
| Net increase in  cash and cash equivalents                                     |       |                                              | 110,793    |   |   |   | 44,034 |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                              |       |                                              | 377,747    |   |   |   | 231,944 |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                    |       |                                              | $          | 488,540 |   |   |   | $ | 275,978 |   |   |

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(1)    See the Company’s filing on Form 10-K/A filed withthe SEC.

(2)    See Note24 to the condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

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**UTSTARCOM, INC. NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**1.**   BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidatedfinancial statements include the accounts of UTStarcom, Inc. (the “Company”)and its wholly and majority owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in the preparation of thecondensed consolidated financial statements. The Company also consolidatesvariable interest entities (“VIE”) as defined by Financial Accounting StandardsBoard Interpretation No. 46 (“FIN 46”), “Consolidation of VariableInterest Entities.” The minority interests in consolidated subsidiaries andequity in affiliated companies are shown separately in the condensedconsolidated financial statements. Investments in affiliated companies areaccounted for using the cost or equity method, as applicable.

The accompanying financial statements as of June 30,2004 and for the three and six months ended June 30, 2004 and 2003 havebeen prepared by the Company, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. The December 31,2003 balance sheet was derived from audited financial statements, but does notinclude all disclosures required by generally accepted accounting principles.These condensed consolidated financial statements should be read in conjunctionwith the Company’s audited December 31, 2003 financial statements,including the notes thereto, and the other information set forth in the Company’sAmended Annual Report on Form 10-K/A for the year ended December 31,2003 as filed with the SEC on April 13, 2005.

In theopinion of management, the accompanying condensed consolidated financialstatements reflect all adjustments (consisting of only normal recurring adjustments)considered necessary for a fair presentation of the Company’s financialcondition, the results of its operations and its cash flows for the periodsindicated. The results of operations for the three and six months ended June 30,2004 are not necessarily indicative of the operating results for the full year.

**2.   REVENUERECOGNITION:**

Revenues from sales of telecommunications equipmentare recognized when persuasive evidence of an arrangement exists, delivery ofthe product has occurred, customer acceptance has been obtained, the fee isfixed or determinable and collectability is reasonably assured. If the paymentdue from the customer is not fixed or determinable due to extended paymentterms, revenue is recognized as payments become due from the customer, assumingall other criteria for revenue recognition are met. Any payments received priorto revenue recognition are recorded as customer advances. Normal payment termsdiffer for various reasons amongst different customer regions, depending uponcommon business practices for customers within a region. Shipping and handlingcosts are recorded as revenues and costs of revenues. Any expected losses oncontracts are recognized immediately.

Sales may be generated from complex contractualarrangements that require significant revenue recognition judgments,particularly in the areas of multiple element arrangements. Where multipleelements exist in an arrangement, the arrangement fee is allocated to thedifferent elements based upon verifiable objective evidence of the fair valueof the elements, as governed under EITF 00-21, and SEC Staff AccountingBulletin No. 104 “SAB 104.” Multiple element arrangements primarilyinvolve the sale of Personnel Access Systems (“PAS”), a family of wirelessaccess handsets, wireless consumer products and core infrastructure equipmentor Internet Protocol-based PAS (“iPAS”) wireless access systems that 

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employ micro cell radiotechnology and specialized handsets, allowing service providers to offersubscribers both mobile and fixed access to telephone services. These multipleelement arrangements include the sale of PAS or iPAS equipment with handsets,installation and training and the provision of such equipment to differentlocations for the same customer. Revenue is recognized as each element isearned, namely upon installation and acceptance of equipment or delivery ofhandsets, provided that the fair value of the undelivered element(s) hasbeen determined, the delivered element has stand-alone value, there is no rightof return on delivered element(s), and the vendor is in control of theundelivered element(s).

Final acceptance is required for revenue recognitionwhen installation services are not considered perfunctory. Final acceptanceindicates that the customer has fully accepted delivery of equipment and theCompany is entitled to the full payment. The Company will not recognize revenuebefore final acceptance is granted by the customer if acceptance is consideredsubstantive to the transaction. Additionally, the Company does not recognizerevenue when cash payments are received from customers for transactions that donot have the customer’s final acceptance. The Company records these cashreceipts as customer advances, and defers revenue recognition until finalacceptance is received.

Where multiple elements exist in an arrangement thatincludes software and the software is considered more than incidental to theequipment or services in the arrangement, software and software-relatedelements are recognized under the provisions of Statement of Position 97-2, asamended, and Emerging Issues Task Force Issue No. 03-05. The Companyallocates revenues to each element of software arrangements based onvendor-specific objective evidence (“VSOE”). VSOE of each element is based onthe price charged when the same element is sold separately. The Company usesthe residual method to recognize revenue when an arrangement includes one ormore elements to be delivered at a future date and VSOE of the fair value ofall the undelivered elements exists. Under the residual method, the fair valueof the undelivered elements is deferred and the remaining portion of thearrangement fee is recognized as revenue. If evidence of fair value of one ormore undelivered elements does not exist, revenue is deferred and recognizedwhen delivery of those elements occurs or when fair value can be established.

The Company recognizes revenue for system integration,installation and training upon completion of performance if all other revenuerecognition criteria are met. Other service revenue, such as that related tomaintenance and support contracts, is recognized ratably over the contractterm. Revenues from services were less than 10% of revenues for all periods.

The Company also sells products through resellers.Revenue is generally recognized when the standard price protection period,which ranges from 30 to 90 days, has lapsed. If collectability cannot bereasonably assured in a reseller arrangement, revenue is recognized uponsell-through to the end customer and receipt of cash. There may be additionalobligations in reseller arrangements such as inventory rotation, or stockexchange rights on the product. As such, revenue is recognized in accordancewith Statement of Financial Accounting Standards No. 48 “RevenueRecognition When Right of Return Exists” (“SFAS 48”). The Company has developedreasonable estimates for stock exchanges. Estimates are derived from historicalexperience with similar types of sales of similar products.

The assessment of collectability is also a factor indetermining whether revenue should be recognized. The Company assessescollectability based on a number of factors, including payment history and thecredit-worthiness of the customer. The Company does not request collateral fromits customers. In international sales, the Company often requires letters ofcredit from its customers that can be drawn on demand if the customer defaultson its payment. If the Company determines that collection of a payment is notreasonably assured, the Company recognizes revenue at the time collectionbecomes reasonably assured, which is generally upon receipt of cash.

Because of the nature of doing business in China andother emerging markets, the Company’s billings and/or customer payments may notcorrelate with the contractual payment terms and the Company 

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generally does not enforcecontractual payment terms prior to final acceptance. Accordingly, accountsreceivable are not booked until the Company recognizes the related customerrevenue. Advances from customers are recognized when the Company has collectedcash from the customer, prior to recognizing revenue. Deferred revenue isrecorded if there are undelivered elements after final acceptance has beenobtained.

TheCompany provides a warranty on its equipment and handset sales for a periodgenerally ranging from one to three years from the time of final acceptance.The Company provides for the expected cost of product warranties at the timethat revenue is recognized, based on an assessment of past warranty experience.

**3.   EARNINGSPER SHARE:**

Basic earnings per share is computed by dividing netincome available to holders of common stock by the weighted average number ofshares of the Company’s common stock outstanding during the period. Dilutedearnings per share is determined by adjusting net income as reported by theeffect of dilutive securities and increasing the number of shares bypotentially dilutive shares of common stock outstanding during the period.Potentially dilutive shares of common stock consist of employee stock options,a written call option, warrants, convertible subordinated notes and unvestedacquisition-related stock options.

Thefollowing is a summary of the calculation of basic and diluted earnings pershare (in thousands, except per share data): 
| ** **                                                               | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                               | ** ** | **2004**                                            | ** ** | **2003**                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                               | ** ** | ** **                                          | ** ** | **(As Restated) (1)**                   | ** ** | ** ** | ** ** | **(As Restated) (1)** | ** ** |
| Numerator:                                                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Net income (for  basic EPS computation)                                  |       | $                                                   | 43,863     |                                              |       | $ | 43,450 |   |   | $ | 98,629 |   |   | $ | 84,618 |   |   |
| Effect of  Dilutive Securities 7¤8%  Convertible Subordinated Notes |       | 884                                                 |       |                                              | 1,092      |   |   | 1,798 |   |   | 1,375 |   |   |
| Net income  adjusted for dilutive securities                             |       | $                                                   | 44,747     |                                              |       | $ | 44,542 |   |   | $ | 100,427 |   |   | $ | 85,993 |   |   |
| Denominator:                                                             |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Shares used to compute basic EPS                                         |       | 113,773                                             |       |                                              | 100,698    |   |   | 114,193 |   |   | 104,009 |   |   |
| Dilutive common stock  equivalent shares:                                |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Stock options                                                            |       | 5,010                                               |       |                                              | 6,086      |   |   | 5,668 |   |   | 4,823 |   |   |
| Written call  option                                                     |       | —                                              |       |                                              | —     |   |   | 523 |   |   | — |   |   |
| Conversion of  convertible subordinated notes                            |       | 16,919                                              |       |                                              | 16,919     |   |   | 16,919 |   |   | 10,151 |   |   |
| Warrants                                                                 |       | 5                                                   |       |                                              | 29         |   |   | 17 |   |   | 29 |   |   |
| Unvested  acquisition-related stock                                      |       | 388                                                 |       |                                              | 628        |   |   | 389 |   |   | 629 |   |   |
| Shares used to  compute diluted EPS                                      |       | 136,095                                             |       |                                              | 124,360    |   |   | 137,709 |   |   | 119,641 |   |   |
| Basic earnings per share                                                 |       | $                                                   | 0.39       |                                              |       | $ | 0.43 |   |   | $ | 0.86 |   |   | $ | 0.81 |   |   |
| Diluted earnings  per share                                              |       | $                                                   | 0.33       |                                              |       | $ | 0.36 |   |   | $ | 0.73 |   |   | $ | 0.72 |   |   |

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(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

Certain potential shares related to employee stockoptions and warrants outstanding during the three and six months ended June 30,2004 and 2003 were excluded in the diluted per share computations, since theirexercise prices were greater than the average market price of the Company’scommon stock during the period and, accordingly, their effect is anti-dilutive.For the three months ended June 30, 2004 and 2003, these shares totaled2.0 million with a weighted average exercise price of $36.56 per share and

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1.9 million shareswith a weighted average exercise price of $28.67 per share, respectively. Forthe six months ended June 30, 2004 and 2003, these shares totaled1.8 million with a weighted average exercise price of $37.49 per share and3.2 million shares with a weighted average exercise price of $26.89 pershare, respectively.

On June 30, 2004, each of the Company’s 7¤8%convertible subordinated notes outstanding was eligible for conversion intoshares of common stock. For each $1,000 of aggregate principal amount of notesconverted, the Company will deliver approximately 42.0345 shares of commonstock, if the Company’s stock price exceeds a specified threshold of $26.10. AtJune 30, 2004, the closing price of the Company’s common stock exceededthe specified threshold, which had the effect of increasing the denominator fordiluted earnings per share by 16.9 million. In the June 30, 200310-Q, the earnings per share calculation for the six months ended June 30,2003 was calculated as if the convertible bond had been outstanding for theentire six months rather than for the period from issuance on March 12,2003 through June 30, 2003. This calculation was corrected in the September 30,2003 10-Q filing. As a result, in this filing, the calculation of the weightedaverage number of dilutive shares attributable to the convertible bond for thesix months ended June 30, 2003 decreased from 16.9 million to 10.2 millionshares resulting in an increase in the June 30, 2003 dilutive earnings pershare of three cents from $0.62 per share to $0.65 per share. The Companyentered into convertible bond hedge and call option transactions to reduce thepotential dilution from conversion of the notes. Both the bond hedge and calloption transactions may be settled at the Company’s option either in cash ornet shares and expire on March 1, 2008.

Additionally, during the three months ended June 30,2004, the average price of the Company’s stock exceeded the specified strikeprice of the convertible bond hedge that the Company entered into to reduce thepotential dilution from conversion of the notes. Using the treasury stockmethod, under Statement of Financial Accounting Standards No. 128, “EarningsPer Share” (“SFAS 128”), this would have the effect of decreasing thedenominator for diluted earnings per share by 2.9 million for the threemonths ended June 30, 2004. This would have the effect of decreasing thedenominator for diluted earnings per share by 1.6 million for the three monthsended June 30, 2003.

For the six months ended June 30, 2004, thedilutive and anti-dilutive effects of the call option and the bond hedge werederived by taking the weighted average effects of the first and secondquarters, in accordance with SFAS 128. For the six months ended June 30,2004, this would have the effect of decreasing the denominator for dilutedearnings per share by 4.0 million shares for the bond hedge transaction,and increasing the denominator for diluted earnings per share by0.5 million shares for the call option transaction. For the six monthsended June 30, 2003, this would have the effect of decreasing thedenominator for diluted earnings per share by 0.8 million shares for the bondhedge transaction. However, only the dilutive effect of the 0.5 millionshares with respect to the call option transaction was included in the Company’sdiluted earnings per share calculation above. The convertible bond hedge, underSFAS 128, is always anti-dilutive.

Thenet income for the diluted EPS computation reflects the reduction in interestexpense of $0.9 million and $1.8 million for the three and six monthsended June 30, 2004, respectively, that would result from an assumedconversion of the 7¤8%convertible subordinated notes. The net income for the diluted EPS computationreflects the reduction in interest expense of $1.1 million and $1.4 million forthe three and six months ended June 30, 2003, respectively, that wouldresult from an assumed conversion of the 7¤8% convertiblesubordinated notes.

**4.   STOCK-BASEDCOMPENSATION:**

The Company accounts for employee stock option grantsin accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) and has adopted the disclosure-onlyalternative of SFAS No. 123, as amended by SFAS No. 148, “Accountingfor Stock- Based 

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Compensation” (“SFAS 123”).Under APB 25, compensation expense is based on the difference, if any, on thedate of grant between the fair value of the common stock and the exercise priceof the option.

The fair value of warrants, options or stock exchangedfor services from non-employees is expensed over the period benefited. Thewarrants and options are valued using the Black-Scholes option-pricing model.

Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123to stock-based employee compensation (in thousands, except per sharedata):
| ** **                                                                                                                           | ** ** | **Three months ended June 30,**                        | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **      2004     ** | ** ** | **2003**                                          | ** ** | **     2004      ** | ** ** | **2003** | ** ** |
| ** **                                                                                                                           | ** ** | ** **                                                                 | ** ** | **(As Restated)(1)**                         | ** ** | ** ** | ** ** | **(As Restated)(1)** | ** ** |
| Basic                                                                                                                                |       |                                                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income:                                                                                                                          |       |                                                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                                                                          |       |                                                                       | $          | 43,863                                            |       |   |   | $ | 43,450 |   |   | $ | 98,629 |   |   | $ | 84,618 |   |   |
| Add: Stock-based employee compensation expense included  in reported net income, net of related tax effects |       |                                                                       | 120        |                                              |       |   | 1,681 |   |   | 175 |   |   | 2,181 |   |   |
| Deduct: Total compensation expense determined  under fair value based method for all awards, net of related tax effects    |       |                                                                       | (9,092     | )                                                 |       |   | (7,786 | ) |   | (17,057 | ) |   | (14,202 | ) |   |
| Pro forma net  income                                                                                                                |       |                                                                       | $          | 34,891                                            |       |   |   | $ | 37,345 |   |   | $ | 81,747 |   |   | $ | 72,597 |   |   |
| Basic income per share:                                                                                                              |       |                                                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                                                                          |       |                                                                       | $          | 0.39                                              |       |   |   | $ | 0.43 |   |   | $ | 0.86 |   |   | $ | 0.81 |   |   |
| Pro forma                                                                                                                            |       |                                                                       | $          | 0.31                                              |       |   |   | $ | 0.37 |   |   | $ | 0.72 |   |   | $ | 0.70 |   |   |
| Diluted                                                                                                                              |       |                                                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income:                                                                                                                          |       |                                                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                                                                          |       |                                                                       | $          | 43,863                                            |       |   |   | $ | 43,450 |   |   | $ | 98,629 |   |   | $ | 84,618 |   |   |
| Effect of dilutive securities 7¤8%  Convertible subordinated notes                                                              |       |                                                                       | 884        |                                              |       |   | 1,092 |   |   | 1,798 |   |   | 1,375 |   |   |
| Add: Stock-based employee compensation expense included  in reported net income, net of related tax effects |       |                                                                       | 120        |                                              |       |   | 1,681 |   |   | 175 |   |   | 2,181 |   |   |
| Deduct: Total compensation expense determined  under fair value method for all awards, net of related tax effects          |       |                                                                       | (9,092     | )                                                 |       |   | (7,786 | ) |   | (17,057 | ) |   | (14,202 | ) |   |
| Pro forma net  income                                                                                                                |       |                                                                       | $          | 35,775                                            |       |   |   | $ | 38,437 |   |   | $ | 83,545 |   |   | $ | 73,972 |   |   |
| Diluted income per share:                                                                                                            |       |                                                                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                                                                          |       |                                                                       | $          | 0.33                                              |       |   |   | $ | 0.36 |   |   | $ | 0.73 |   |   | $ | 0.72 |   |   |
| Pro forma                                                                                                                            |       |                                                                       | $          | 0.27                                              |       |   |   | $ | 0.32 |   |   | $ | 0.62 |   |   | $ | 0.64 |   |   |

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(1)          Seethe Company’s filing on Form 10-K/A filed with the SEC.

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**5.**   COMPREHENSIVE INCOME:

The reconciliation of netincome to comprehensive income for the three and six months ended June 30,2004 and 2003 is as follows (in thousands):
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                            | ** ** | **2003**                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | ** **                                          | ** ** | **(As Restated)(1)**                         | ** ** | ** ** | ** ** | **(As Restated)(1)** | ** ** |
| Net income                                    |       | $                                                   | 43,863     |                                              |       | $ | 43,450 |   |   | $ | 98,629 |   |   | $ | 84,618 |   |   |
| Unrealized gains  (losses) on investments     |       | 712                                                 |       |                                              | 609        |   |   | 479 |   |   | 1,183 |   |   |
| Change in cumulative  translation adjustments |       | (173                                                | )          |                                              | (10        | ) |   | 501 |   |   | (44 | ) |   |
| Total comprehensive  income                   |       | $                                                   | 44,402     |                                              |       | $ | 44,049 |   |   | $ | 99,609 |   |   | $ | 85,757 |   |   |

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(1)          Seethe Company’s filing on Form 10-K/A filed with the SEC.

**6.**   CASH, CASH EQUIVALENTS AND SHORT-TERMINVESTMENTS:

Cash and cash equivalents consist of instruments withmaturities of three months or less at the date of purchase. There were noavailable-for-sale securities included in cash and cash equivalents at June 30,2004 or December 31, 2003. Short-term investments, consisting entirely ofavailable-for-sale securities, were $77.0 million and $48.6 million at June 30,2004 and December 31, 2003, respectively. These available-for-salesecurities consist of government-backed notes, commercial paper, floating ratecorporate bonds and fixed income corporate bonds. These investments arerecorded at fair value. Any unrealized holding gains or losses are reported asa component of comprehensive income. Realized gains and losses are reported inearnings.

TheCompany accepts bank notes receivable with maturity dates between three and sixmonths from its customers in China in the normal course of business. Bank notesreceivable were $100.0 million and $11.5 million at June 30, 2004 and December 31,2003, respectively, and have been included in cash and cash equivalents andshort-term investments. The Company may discount these notes with bankinginstitutions in China. A sale of these notes is reflected as a reduction ofcash and cash equivalents or short-term investments and the proceeds of thesettlement of these notes are included in cash flows from operating activitiesin the consolidated statement of cash flows. There were no bank notesreceivable sold during the three and six months ended June 30, 2004; therewere $82.3 million and $111.3 million of bank notes receivable sold during thethree and six months ended June 30, 2003, respectively. Any notes thathave been sold are not included in the Company’s consolidated balance sheets asthe criteria for sale treatment established by Statement of FinancialAccounting Standards No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishment of Liabilities” (“SFAS 140”), has beenmet. Under SFAS 140, upon a transfer, the transferor or entity mustderecognize financial assets when control has been surrendered and thetransferee obtains control over the assets. In addition, the transferred assetshave been isolated from the transferor, beyond the reach of its creditors, andthe transferee has the right, without conditions or constraints, to pledge orexchange the assets it has received. The costs of settling or transferringthese notes receivable were $0.4 million for both the three and six monthsended June 30, 2003.

**7.   RESTRICTEDCASH AND SHORT-TERM INVESTMENTS:**

At June 30, 2004, the Company had restricted cashand short-term investments of $42.6 million primarily comprised of $27.4million of restricted short-term investments and $8.5 million of restrictedcash for standby letters of credit, $2.9 million of restricted cash held inescrow as it relates to the Company’s acquisition of TELOS and restricted cashof a $3.7 million time deposit required for Japanese tax 

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purposes. At December 31,2003, the Company had restricted cash and short-term investments of $24.4million primarily comprised of $20.5 million of restricted short-terminvestments for standby letters of credit and restricted cash of a $3.7 milliontime deposit required for Japanese tax purposes.

TheCompany issues standby letters of credit primarily to support internationalsales activities outside of China. When the Company submits a bid for a sale,often the potential customer will require that the Company issue a bid bond ora standby letter of credit to demonstrate its commitment through the bidprocess. In addition, the Company may be required to issue standby letters ofcredit as guarantees for advance customer payments upon contract signing orperformance guarantees. The standby letters of credit usually expire six tonine months from date of issuance without being drawn by the beneficiarythereof. Finally, the Company may issue commercial letters of credit in supportof purchase commitments.

**8.   ACCOUNTSAND NOTES RECEIVABLE:**

TheCompany accepts commercial notes receivable with maturity dates between threeand six months from its customers in China in the normal course of business.Notes receivable available for sale were $42.9 million and $11.4 millionat June 30, 2004 and December 31, 2003, respectively. The Company maydiscount these notes with banking institutions in China. A sale of these notesis reflected as a reduction of notes receivable and the proceeds of thesettlement of these notes are included in cash flows from operating activitiesin the consolidated statement of cash flows. There were no notes receivablesold during the three and six months ended June 30, 2004; there were $25.3million and $44.5 million of notes receivable sold during the three and sixmonths ended June 30, 2003, respectively. Any notes that have been soldare not included in the Company’s consolidated balance sheets as the criteriafor sale treatment established by SFAS 140, has been met. The costs of settlingor transferring these notes receivable were $0.3 million and $0.5 million forthe three and six months ended June 30, 2003, respectively, and wereincluded in other income, net in the Consolidated Statements of Operations.

**9.   SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION:**
| ** **                        | ** ** | **Six months ended June 30,**                                | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                        | ** ** | **(in thousands)**                                                          | ** ** |
| Cash paid during  the period for: |       |                                                                             |       |   |   |   |   |   |   |
| Interest                          |       |                                                                             | $          | 1,773 |   |   |   | $ | 508 |   |   |
| Income taxes                      |       |                                                                             | $          | 3,818 |   |   |   | $ | 21,606 |   |   |

 
| ** **                                           | ** ** | **Six months ended June 30,**                                | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                                                          | ** ** |
| Non-cash  operating activities were as follows:      |       |                                                                             |       |   |   |   |   |   |   |
| Accounts receivable  transferred to notes receivable |       |                                                                             | $          | 55,876 |   |   |   | $ | 25,258 |   |   |
|                                                      |            |                                                                                  |            |  |  |  |  |  |  |  |  |

 

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**10.**   INVENTORIES AND DEFERREDCOSTS/INVENTORIES AT CUSTOMER SITES UNDER CONTRACTS:

As of June 30,2004 and December 31, 2003, total inventories and deferredcosts/inventories at customer sites under contracts consist of the following:
| ** **                                                      | ** ** | **June 30,**         | ** **     | **December 31,**     | ** ** |
|-----------------------------------------------------------------|------------|---------------------------|----------------|---------------------------|------------|
| ** **                                                      | ** ** | **2004**                  | ** **     | **2003**                  | ** ** |
| ** **                                                      | ** ** | **(As Restated)(2)** | ** **     | **(As Restated)(1)** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**   | ** **     |
| *Inventories*                                                   |       |                      |           |                      |       |   |   |   |   |
| Raw materials                                                   |       |                      | $ 164,601 |                      |       |   | $ 66,753 |   |   |
| Work-in-process                                                 |       |                      | 84,461         |                      |       |   | 51,116 |   |   |
| Finished goods                                                  |       |                      | 63,827         |                      |       |   | 48,206 |   |   |
| Inventories at  customer sites without contracts                |       |                      | 122,690        |                      |       |   | 90,990 |   |   |
|                                                            |       |                      | $ 435,579 |                      |       |   | $ 257,065 |   |   |
| *Deferred  costs/Inventories at customer sites under contracts* |       |                      | $ 318,723 |                      |       |   | $ 542,060 |   |   |

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(1)          Seethe Company’s filing on Form 10-K/A filed with the SEC.

(2)          SeeNote 24 to the condensed consolidated financial statements.

**11.**   ACQUISITIONS

***TELOS Technology, Inc.***

On May 19, 2004, theCompany completed its acquisition of substantially all of the assets andcertain liabilities of TELOS Technology, Inc. (“TELOS”) and itssubsidiaries. TELOS is a provider of mobile switching products and services forvoice and data communication networks to developing rural, enterprise andemerging wireless markets. The total consideration for the acquisition, fundedfrom cash on hand, was approximately $30.3 million. The Company paid $29.0million in cash, in addition to $1.3 million of acquisition-related transactioncosts. Within one year of the acquisition date, additional payments totaling amaximum of $19.0 million may become payable based upon revenue recognized fromthe sale of TELOS products. In the event these revenue milestones are met, theoriginal purchase price will be adjusted for the amount of the contingentpayment in accordance with Statement of Financial Accounting Standards No. 141(“SFAS 141”), “Business Combinations.”

The existing technologyacquired included the entire TELOS product family of code division multipleaccess (or “CDMA”) softswitch technology products, supporting servers andoperations maintenance centers. CDMA technology is the common platform on whichthird-generation wireless data services and applications are built. Byassigning unique codes to each communication to differentiate it from others inthe same spectrum, CDMA technology allows many users to occupy the same timeand frequency allocations in a given band or space. The TELOS product line willbe integrated with the Company’s suite of CDMA products, strengthening theCompany’s existing CDMA product portfolio. In addition to developed producttechnology, the Company acquired fixed assets, in-process research anddevelopment (“IPR&D”), an assembled workforce of approximately 60employees, customer relationships and recorded goodwill.

Subsequent to the May 19,2004 acquisition of TELOS, the Company completed the allocation of the purchaseprice based in part upon an independent valuation. The amount of the purchaseprice allocated to IPR&D of $1.4 million was charged to the Company’sresults of operations, as no alternative future uses existed at the acquisitiondate. The Company recorded goodwill of $6.6 million in connection with theacquisition. The results of operations of TELOS have been included in theCompany’s consolidated results of operations beginning on the acquisition dateof May 19, 2004.

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In assessing TELOS’sIPR&D projects, the Company considered key product characteristicsincluding the product’s development stage at the acquisition date, the product’slife cycle and the product’s future prospects. The Company also considered therate at which technology changes in the telecommunications equipment industry,the industry’s competitive environment and the economic outlook for both localand global markets.

As of the acquisitiondate, TELOS had two projects under development that qualified for IPR&D:the Sonata SE product family and the iCell product. The objective of bothprojects is to enhance the functionality of products designed to comply withthe CDMA2000 technology standard. Specifically, the objective of the Sonata SEproduct family is to provide additional features to operation maintenancecenter products. The objective of the iCell product is to enhance iCell basestation features.

The projects underdevelopment are enhancements to existing products that do not affect the functionalityof those existing products. As such, the significant risk the Company faces isto complete these projects within the scope of the budget. As of the closingdate, the Sonata SE and the iCell projects were approximately 20% and 30%complete, respectively. As of June 30, 2004, anticipated completion datesand estimated costs to complete the Sonata SE and iCell projects were June 2005and $1.1 million and December 2004 and $0.2 million, respectively.

Thefollowing table summarizes the allocation of the purchase price for TELOS basedupon the independent valuation:
| ** **                                                                                        | ** ** | **May 19, 2004** | ** **    |
|---------------------------------------------------------------------------------------------------|------------|----------------------------|---------------|
| ** **                                                                                        | ** ** | **(in thousands)**    | ** **    |
| Fair value of  tangible net assets                                                                |       |                       |          |   |   |
| Inventory                                                                                         |       |                       | $ 1,382  |   |   |
| Property, plant and equipment                                                                     |       |                       | 2,010         |   |   |
| Other tangible assets                                                                             |       |                       | 1,369         |   |   |
| Customer relationships                                                                            |       |                       | 5,000         |   |   |
| Existing  technology                                                                              |       |                       | 15,900        |   |   |
| In-process  research and development                                                              |       |                       | 1,400         |   |   |
| Liabilities  assumed                                                                              |       |                       | (3,380        | ) |   |
| Excess of costs  of acquiring TELOS over fair value of identified net assets acquired  (goodwill) |       |                       | 6,625         |   |   |
|                                                                                              |       |                       | $ 30,306 |   |   |

 

The estimated useful livesof the customer relationships and existing technology intangible assets arefive years.

Refer to the consolidatedtable below for the pro forma results of operations reflecting the combinedresults of the Company and TELOS for the three and six months ended June 30,2004 and 2003 as if the business combination occurred at the beginning of theperiod. These results do not purport to be indicative of what would haveoccurred had the acquisition been made as of that date or the results ofoperations which may occur in future periods.

***Hyundai Syscomm, Inc.***

On April 27, 2004,the Company completed its acquisition of the assets, substantially all of theintellectual property, certain employees and certain contracts related toHyundai Syscomm, Inc.’s (“HSI”) CDMA infrastructure business for marketsoutside of Korea. Subject to the attainment of certain milestones and thetransfer of certain know-how, the total consideration for this transaction wasapproximately $12.3 million excluding transaction costs of $1.8 million. Therewas $7.3 million in cash payable at the closing date and an additional $3.0million in cash payable one year from the closing date. 

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Theremaining purchase price was comprised of $2.0 million payable upon thecompletion of technical training by HSI employees to Company manufacturingstaff in China under the terms of a Training Services Agreement and $1.8million of transaction costs. Not included in the purchase price was $2.0million payable upon the completion of certain revenue milestones. In the eventthese revenue milestones are met, the original purchase price will be adjustedfor the amount of the contingent payment in accordance with Statement ofFinancial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.”In conjunction with this transaction, the Company loaned HSI $3.2 million at aneffective interest rate of 12% per annum, which was used by HSI to satisfyoutstanding debt obligations. The principal amount of the loan is due in April 2005.The Company may contractually offset HSI’s payment obligations against theoutstanding $3.0 million of the purchase price and any other liabilities.

Under the terms of thetransaction with HSI, the Company acquired existing technologies and enteredinto non-compete and licensing agreements. The existing technologies acquiredwere the base transceiver station (“BTS”) and base station controllers (“BSC”)product lines. BTS is the antenna and radio equipment that enables wirelessdevices to communicate with a land-based transmission network in a given range.BSC performs radio signal management functions for BTS, managing functions suchas frequency assignment and handoff. As part of the asset purchase agreement,the Company and HSI entered into a training services agreement, whereby HSIemployees will provide technical training to Company manufacturing staff inChina for the sixth-month period subsequent to the acquisition. This technologyand technological know-how will strengthen the Company’s existing CDMA productportfolio and the development of future CDMA technology.

In addition to acquiringexisting technology, the Company entered non-compete and licensing agreements. Thenon-compete agreement prohibits HSI from competing against the Company in allcountries except Korea for three years from the valuation date. The licensingagreement requires that HSI pay the Company 1% of revenue as royalty for theusage of the intellectual property that the Company acquired under the terms ofthe acquisition for fifteen years subsequent to the valuation date.

Subsequent to the April 27,2004 acquisition of HSI, the Company completed the allocation of the purchaseprice based in part upon an independent valuation. The Company recordedgoodwill of $6.8 million in connection with the acquisition. The results ofoperations of HSI have been included in the Company’s consolidated results ofoperations beginning on the acquisition date of April 27, 2004.

Thefollowing table summarizes the final allocation of the purchase price for HSIbased upon the final independent valuation:
| ** **                                                                                     | ** ** | **April 27, 2004** | ** **    |
|------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|
| ** **                                                                                     | ** ** | **(in thousands)**      | ** **    |
| Fair value of  tangible net assets                                                             |       |                         |          |   |   |
| Property, plant and equipment                                                                  |       |                         | $ 1,440  |   |   |
| Other tangible assets                                                                          |       |                         | 673           |   |   |
| Existing  technology                                                                           |       |                         | 3,559         |   |   |
| Non-compete  intangible asset                                                                  |       |                         | 760           |   |   |
| IP license  agreement                                                                          |       |                         | 890           |   |   |
| Excess of costs  of acquiring HSI over fair value of identified net assets acquired (goodwill) |       |                         | 6,750         |   |   |
|                                                                                           |       |                         | $ 14,072 |   |   |

 

The intangible assets haveestimated useful lives ranging from three to five years as follows: existingtechnology, five years; non-compete agreement, three years; intellectualproperty license agreement, three years.

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Refer to the consolidatedtable below for pro forma results of operations reflecting the combined resultsof the Company and HSI for the three and six months ended June 30, 2004and 2003 as if the business combination occurred at the beginning of the period.These results do not purport to be indicative of what would have occurred hadthe acquisition been made as of that date or the results of operations whichmay occur in future periods.

Theunaudited pro forma results of operations include historical operations of theCompany, TELOS and HSI. Certain non-recurring charges were recorded byTELOS and included $2.3 million of expense for warrants issued in conjunctionwith an issuance of senior convertible notes in the second quarter of 2003 and$0.1 million of restructuring costs incurred in the first quarter of 2003.
| ** **                                          | ** ** | ** **                                                         | ** ** | ** **                | ** **                          | ** **                     | ** ** | ** **                       | ** **                   | ** **                      | ** ** | ** **                    | ** **                   | **Pro Forma  adjustments to  reflect depreciation** | ** ** | ** **                                | ** **  | ** **        | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------|-------------------------------------|--------------------------------|------------|----------------------------------|------------------------------|---------------------------------|------------|-------------------------------|------------------------------|--------------------------------------------------------------------|------------|-------------------------------------------|-------------|-------------------|------------|
| ** **                                          | ** ** | ** **                                                         | ** ** | ** **                | ** **                          | **TELOS**                      | ** ** | **Hyundai**                      | ** **                   | **and amortization**       | ** ** | ** **                    | ** **                   | ** **                                                         | ** ** |
| ** **                                          | ** ** | **UT Starcom, Inc.**                                     | ** ** | **Technology, Inc.** | ** **                          | **Syscomm, Inc.**         | ** ** | **of acquired assets** | ** **                   | **Pro Forma Results** | ** ** |
| ** **                                          | ** ** | **Three  Months**                                                  | ** ** | **Three  Months**         | ** **                          | **For the  period  from** | ** ** | **Three  Months**                | ** **                   | **For the  period  from**  | ** ** | **Three  Months**             | ** **                   | **Three  Months**                                                  | ** ** | **Three  Months**                         | ** **  | **Three  Months** | ** ** | **Three  Months** | ** ** |
| ** **                                          | ** ** | **Ended**                                                          | ** ** | **Ended**                 | ** **                          | **April 1**               | ** ** | **Ended**                        | ** **                   | **April 1**                | ** ** | **Ended**                     | ** **                   | **Ended**                                                          | ** ** | **Ended**                                 | ** **  | **Ended**         | ** ** | **Ended** | ** ** |
| ** **                                          | ** ** | **June 30,**                                                  | ** ** | **June 30,**         | ** **                          | **to May 19,**       | ** ** | ** June 30, **    | ** **                   | **to April 27,**      | ** ** | ** June 30, ** | ** **                   | **  June 30,  **                          | ** ** | **  June 30,  ** | ** **  | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                          | ** ** | **2004**                                                           | ** ** | **2003**                  | ** **                          | **2004**                       | ** ** | **2003**                         | ** **                   | **2004**                        | ** ** | **2003**                      | ** **                   | **2004**                                                           | ** ** | **2003**                                  | ** **  | **2004**          | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | ** **                                                         | ** ** | **(As Restated)(1)** | ** **                          | ** **                     | ** ** | ** **                       | ** **                   | ** **                      | ** ** | ** **                    | ** **                   | ** **                                                         | ** ** | ** **                                | ** **  | ** **        | ** ** | **(As Restated)(1)** | ** ** |
| ** **                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| Proforma adjusted net revenue                       |       | $ 689,628                                                     |       |                      | $ 405,834                      |                           |       |                             | $    364 |                            |       |                          | $    510 |                                                               |       |                                      | $ 953  |              |       |   | $ 5,780 |   |   |   | $   — |   |   |   | $      — |   |   | $ 690,945 |   |   | $ 412,124 |   |   |
| Proforma adjusted net income(loss)                  |       | $ 43,863                                                      |       |                      | $ 43,450                       |                           |       |                             | $ (1,695                | )                               |       |                          | $ (3,095                | )                                                                  |       |                                      | $ (276 | )                 |       |   | $ (2,134 | ) |   |   | $ (792 | ) |   |   | $ (1,331 | ) |   | $ 41,100 |   |   | $ 36,890 |   |   |
| Proforma adjusted basic earnings(loss) per  share   |       | $     0.39                                |       |                      | $     0.43 |                           |       |                             |                         |                            |       |                          |                         |                                                               |       |                                      |        |              |       |   |   |   |   |   |   |   |   |   |   |   |   | $     0.36 |   |   | $     0.37 |   |   |
| Proforma adjusted  diluted earnings(loss) per share |       | $     0.33                                |       |                      | $     0.36 |                           |       |                             |                         |                            |       |                          |                         |                                                               |       |                                      |        |              |       |   |   |   |   |   |   |   |   |   |   |   |   | $     0.31 |   |   | $     0.31 |   |   |

 
| ** **                                          | ** ** | ** **                                                         | ** ** | ** **                | ** **                          | ** **                     | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** **                    | ** **    | **Pro Forma  adjustments to  reflect depreciation** | ** ** | ** **                    | ** **    | ** **        | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------|-------------------------------------|--------------------------------|------------|----------------------------------|---------------|---------------------------------|------------|-------------------------------|---------------|--------------------------------------------------------------------|------------|-------------------------------|---------------|-------------------|------------|
| ** **                                          | ** ** | ** **                                                         | ** ** | ** **                | ** **                          | **TELOS**                      | ** ** | **Hyundai**                      | ** **    | **and amortization ** | ** ** | ** **                    | ** **    | ** **                                                         | ** ** |
| ** **                                          | ** ** | **UT Starcom, Inc.**                                     | ** ** | **Technology, Inc.** | ** **                          | **Syscomm, Inc.**         | ** ** | **of acquired assets** | ** **    | **Pro Forma Results** | ** ** |
| ** **                                          | ** ** | **Six  Months**                                                    | ** ** | **Six  Months**           | ** **                          | **For the  period  from** | ** ** | **Six  Months**                  | ** **    | **For the  period  from**  | ** ** | **Six  Months**               | ** **    | **Six  Months**                                                    | ** ** | **Six  Months**               | ** **    | **Six  Months**   | ** ** | **Six  Months** | ** ** |
| ** **                                          | ** ** | **Ended**                                                          | ** ** | **Ended**                 | ** **                          | **January 1**             | ** ** | **Ended**                        | ** **    | **January 1**              | ** ** | **Ended**                     | ** **    | **Ended**                                                          | ** ** | **Ended**                     | ** **    | **Ended**         | ** ** | **Ended** | ** ** |
| ** **                                          | ** ** | **June 30,**                                                  | ** ** | **June 30,**         | ** **                          | **to May 19,**       | ** ** | ** June 30, **    | ** **    | **to April 27,**      | ** ** | ** June 30, ** | ** **    | ** June 30, **                                      | ** ** | ** June 30, ** | ** **    | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                          | ** ** | **2004**                                                           | ** ** | **2003**                  | ** **                          | **2004**                       | ** ** | **2003**                         | ** **    | **2004**                        | ** ** | **2003**                      | ** **    | **2004**                                                           | ** ** | **2003**                      | ** **    | **2004**          | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | ** **                                                         | ** ** | **(As Restated)(1)** | ** **                          | ** **                     | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** **                    | ** **    | ** **                                                         | ** ** | ** **                    | ** **    | ** **        | ** ** | **(As Restated)(1)** | ** ** |
| ** **                                          | ** ** | **(In thousands, except per share data)** | ** ** |
| Proforma adjusted net revenue                       |       | $ 1,311,919                                                   |       |                      | $ 736,354                      |                           |       |                             | $ 1,689  |                            |       |                          | $ 1,842  |                                                               |       |                          | $ 2,872  |              |       |   | $ 11,252 |   |   |   | $      — |   |   |   | $      — |   |   | $ 1,316,480 |   |   | $ 749,448 |   |   |
| Proforma adjusted net income(loss)                  |       | $    98,629                                    |       |                      | $ 84,618                       |                           |       |                             | $ (3,953 | )                               |       |                          | $ (6,177 | )                                                                  |       |                          | $ (4,548 | )                 |       |   | $ (7,518 | ) |   |   | $ (2,123 | ) |   |   | $ (2,662 | ) |   | $    88,005 |   |   | $ 68,261 |   |   |
| Proforma adjusted basic earnings(loss) per share    |       | $        0.86              |       |                      | $     0.81 |                           |       |                             |          |                            |       |                          |          |                                                               |       |                          |          |              |       |   |   |   |   |   |   |   |   |   |   |   |   | $        0.77 |   |   | $     0.66 |   |   |
| Proforma adjusted  diluted earnings(loss) per share |       | $        0.73              |       |                      | $     0.72 |                           |       |                             |          |                            |       |                          |          |                                                               |       |                          |          |              |       |   |   |   |   |   |   |   |   |   |   |   |   | $        0.65 |   |   | $     0.58 |   |   |

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(1)         Seethe Company’s filing on Form 10-K/A filed with the SEC.

*AudiovoxCommunications, Inc.*

On June 14, 2004, theCompany announced an agreement to acquire select assets of AudiovoxCommunications Corporation, the wireless handset division of AudiovoxCorporation. The Company will acquire select assets and liabilities, includinginventories, prepaids, third-party payables, accrued expenses and the right tohire approximately 270 employees for $165.1 million in cash. The Company willacquire Audiovox Communications Corporation’s sales, service and supportinfrastructure, its CDMA handset brand, access to supply-chain channels,product marketing expertise and key relationships with CDMA operators in Northand South America. Closing of the transaction is subject to satisfaction ofcertain conditions outlined in the purchase agreement. The Company anticipatesclosing to occur in the fourth quarter of 2004.

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**12.   GOODWILL AND INTANGIBLE ASSETS:**

As of June 30,2004 and December 31, 2003, goodwill and other acquired intangible assetsconsisted of the following (in thousands):
| ** **                     | ** ** | **June 30, 2004** | ** **                                                    | **December 31, 2003** | ** ** |
|--------------------------------|------------|-----------------------------|---------------------------------------------------------------|---------------------------------|------------|
| ** **                     | ** ** | **(in thousands)**     | ** **                                                    |
| Goodwill                       |       |                        | $ 126,252                                                |                            |       |   | $ 113,003 |   |   |
| Less accumulated  amortization |       |                        | (12,823                                                       | )                               |       |   | (12,823 | ) |   |
|                           |       |                        | $ 113,429                                                |                            |       |   | $ 100,180 |   |   |
| Identified  intangible assets: |       |                        |                                                          |                            |       |   |   |   |   |
| Existing technology            |       |                        | $ 43,089                                                 |                            |       |   | $ 23,630 |   |   |
| Less accumulated  amortization |       |                        | (10,630                                                       | )                               |       |   | (7,255 | ) |   |
|                           |       |                        | $ 32,459                                                 |                            |       |   | $ 16,375 |   |   |
| Customer relationships         |       |                        | $ 32,820                                                 |                            |       |   | $ 27,820 |   |   |
| Less accumulated  amortization |       |                        | (3,097                                                        | )                               |       |   | (1,623 | ) |   |
|                           |       |                        | $ 29,723                                                 |                            |       |   | $ 26,197 |   |   |
| Trade names                    |       |                        | $      940                      |                            |       |   | $      940 |   |   |
| Less accumulated  amortization |       |                        | (509                                                          | )                               |       |   | (274 | ) |   |
|                           |       |                        | $      431                      |                            |       |   | $      666 |   |   |
| Backlog                        |       |                        | $   1,950                                      |                            |       |   | $   1,950 |   |   |
| Less accumulated  amortization |       |                        | (1,950                                                        | )                               |       |   | (1,137 | ) |   |
|                           |       |                        | $         — |                            |       |   | $      813 |   |   |
| Non-compete agreement          |       |                        | $      760                      |                            |       |   | $         — |   |   |
| Less accumulated  amortization |       |                        | (42                                                           | )                               |       |   | — |   |   |
|                           |       |                        | $      718                      |                            |       |   | $         — |   |   |
| Royalty licenses               |       |                        | $      890                      |                            |       |   | $         — |   |   |
| Less accumulated  amortization |       |                        | (30                                                           | )                               |       |   | — |   |   |
|                           |       |                        | $      860                      |                            |       |   | $         — |   |   |
| Total intangible  assets       |       |                        | $ 64,191                                                 |                            |       |   | $ 44,051 |   |   |

 

Amortization expense was$3.5 million and $1.5 million for the three months ended June 30,2004 and 2003, respectively, and was $6.0 million and $2.2 million for the sixmonths ended June 30, 2004 and 2003, respectively. The estimated aggregateamortization expense for intangibles for each of the five years beginning theyear ended December 31, 2005 through 2009 is $12.1 million, $11.0 million,$10.8 million, $9.0 million and $4.8 million.

The net increase ingoodwill during the six months ended June 30, 2004 was $13.3 million, dueto a $13.4 million increase from $6.6 million and $6.8 million of goodwillrecorded on the acquisitions of TELOS and HSI, respectively, offset by a $0.1million reduction in goodwill resulting from the settlement of an outstandingliability related to the CommWorks acquisition for $0.1 million less than hadbeen accrued. Intangibles increased by $26.1 million during the six monthsended June 30, 2004 due to $20.9 million and $5.2 million of intangiblesrecorded on the acquisitions of TELOS and HSI, respectively.

The estimated useful life of purchased technology isfrom one to five years, the estimated useful life of customer relationships isfive years to ten years, the estimated useful life of non-compete agreements isthree years, the estimated useful lives of backlog and trade names are from oneto two years and the estimated useful lives of royalty licenses are five years.

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**13.   LONG-TERM INVESTMENTS:**

The Company’s investments are as follows (inthousands):
| ** **                                   | ** ** | **June 30, 2004** | ** ** | **December 31,2003** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Softbank China                               |       |                        | $          | 5,294                     |       |   |   | $ | 5,308 |   |   |
| Cellon  International                        |       |                        | 8,000      |                      |       |   | 8,000 |   |   |
| Restructuring  Fund No. 1               |       |                        | 1,838      |                      |       |   | 1,861 |   |   |
| Global Asia  Partners L.P.                   |       |                        | 1,150      |                      |       |   | 1,653 |   |   |
| Fiberxon Inc.                                |       |                        | 3,000      |                      |       |   | 2,000 |   |   |
| InterWave  Communications International Ltd. |       |                        | 3,678      |                      |       |   | 3,319 |   |   |
| Joint Venture  with Matsushita               |       |                        | —     |                      |       |   | 517 |   |   |
| Others                                       |       |                        | 1,544      |                      |       |   | 1,408 |   |   |
| Total                                        |       |                        | $          | 24,504                    |       |   |   | $ | 24,066 |   |   |

 

*Softbank China*

The Company has a$5.3 million investment in Softbank China, an investment fund establishedby SOFTBANK CORP. focused on investments in Internet companies in China. Thisinvestment is intended to enable the Company to participate in the anticipated growthof Internet-related businesses in China. SOFTBANK CORP. and its relatedcompanies are significant stockholders of the Company. The Company’s investmentconstitutes 10% of the funding for Softbank China, with SOFTBANK CORP.contributing the remaining 90%. The fund has a separate management team, andnone of the Company’s employees are employed by the fund. Many of the fund’sinvestments are and will be in privately held companies, many of which arestill in the start-up or development stages. These investments are inherentlyrisky as the markets for the technologies or products the companies have underdevelopment are typically in the early stages and may never materialize. TheCompany accounts for this investment under the cost method and recorded no lossesand insignificant losses in the carrying value of this investment during thethree and six months ended June 30, 2004, respectively. The Companyrecorded insignificant losses and losses of $0.1 million due to another-than-temporary decline in the carrying value of this investment duringthe three and six months ended June 30, 2003, respectively.

*Cellon*

In September 2001,the Company invested $2.0 million in Cellon International Holdings Corporation(“Cellon”). Cellon designs wireless terminals and related technology forhandset manufacturers and private distributors. The Company invested anadditional $3.0 million in each of April and December 2002. As of June 30,2004, the Company had a 9% ownership interest in Cellon. This investment isaccounted for under the cost method, and its carrying value is evaluated forpossible impairment based on the achievement of business objectives andmilestones, the financial condition and prospects of the company and otherrelevant factors. As of June 30, 2004, the Company has not recorded anyimpairment of this investment. The Company has outstanding purchase commitmentswith Cellon. Refer to Note 19, Related Party Transactions.

*Restructuring Fund No. 1*

During fiscal 2002, theCompany invested $2.0 million in Restructuring Fund No. 1, a venturecapital investment limited partnership established by SOFTBANK INVESTMENTCORP., an affiliate of SOFTBANK CORP. SOFTBANK America Inc., an entityaffiliated with SOFTBANK CORP., is a significant stockholder of the Company.The fund focuses on leveraged buyout investments in companies in Asiaundergoing restructuring or bankruptcy procedures. The total fund offering isexpected to be between approximately $150.0 million and$226.0 million, with each investor contributing a minimum of 

19

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$0.8 million.The fund has a separate management team, and none of the Company’s employeesare employed by the fund. The Company accounts for this investment under theequity method of accounting. There were no gains or losses and insignificantlosses during the three and six months ended June 30, 2004, respectively.

*Global AsiaPartners, L.P.*

In June 2002, theCompany invested $1.0 million in Global Asia Partners L.P., and anadditional $1.0 million in June 2003, with a commitment to invest upto a maximum of $5.0 million. The remaining amount is due at such timesand in such amounts as shall be specified in one or more future capital callsto be issued by the general partner. The fund size is anticipated to be$10.1 million and the fund was formed to make private equity investmentsin private or pre-IPO technology and telecommunications companies. The fund’sgeographic focus is on technology investments in Asia, in particular India andChina. The Company accounts for this investment under the equity method ofaccounting. There were $0.5 million of losses for the three and six monthsended June 30, 2004 and no gains or losses for the three and six monthsended June 30, 2003.

*Fiberxon*

In September 2002,the Company invested $2.0 million in Fiberxon, Inc., a company thatdevelops and sells optical modules and related systems. In March 2004, theCompany invested an additional $1.0 million in Fiberxon. This investment isaccounted for under the cost method, and its carrying value is evaluated forpossible impairment based on the achievement of business objectives andmilestones, the financial condition and prospects of the company and otherrelevant factors. As of June 30, 2004, the Company has not recorded anyimpairment in respect of this investment. The Company has outstanding purchasecommitments with Fiberxon. Refer to Note 19, Related Party Transactions.

*Interwave*

During 2002, the Companypurchased approximately 5.8 million shares of common stock of InterWaveCommunications, International Ltd. Inc., a technology company listed onNasdaq, for approximately $3.0 million. In addition, the Company receivedwarrants to purchase 2.0 million shares of InterWave’s common stock at$0.21 per share. The Company’s holdings were adjusted for a 1:10 reverse stocksplit on April 30, 2003, and were 0.6 million shares of common stockand warrants to purchase 0.2 million shares of InterWave’s common stock at$2.10 per share. The fair value of Company’s common stock investment inInterWave was $3.0 million as of June 30, 2004. Changes in the fair valueof the stock are reflected in other comprehensive income in equity asunrealized gains or losses. The Company recorded increases of $0.7 million and$0.6 million for the three months ended June 30, 2004 and 2003,respectively, in other comprehensive income in equity. The Company recordedincreases of $0.4 million for both the six months ended June 30, 2004 and2003, respectively in other comprehensive income in equity. The warrants werevalued at $0.7 million at June 30, 2004, using the Black-Scholesoption-pricing model. The Company recorded income of $0.2 million for both thethree months ended June 30, 2004 and 2003, to reflect the change in thefair value of the warrants. The Company recorded insignificant losses for thesix months ended June 30, 2004 and income of $0.2 million for the sixmonths ended June 30, 2003, to reflect the change in the fair value of thewarrants. On July 27, 2004, Alvarion, Ltd. agreed to acquire InterWave for$5.75 per share.

*Matsushita*

In July, 2002, the Company entered into a jointventure agreement with Matsushita Communication Industrial Co., Ltd., astockholder of the Company, to jointly design and develop, manufacture and selltelecommunication products. The Company has a 49% ownership interest in thejoint venture company, 

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which has a registeredshare capital of $10.0 million. The cash consideration of$4.9 million payable by the Company was paid in October 2002. As theCompany does not have voting control over significant matters of the joint venturecompany, the investment in and results of operations of the joint venturecompany are accounted for using the equity method of accounting.

Pursuant to the jointventure agreement with Matsushita, the Company is jointly liable for the lossesincurred in the operations of the joint venture up to the maximum of itsinvestment in the entity. At June 30, 2004, the losses had exceeded thisamount; however, the Company accrued additional losses of approximately $1.2million and $2.2 million during the three and six months ended June 30,2004, respectively. The Company has cumulative losses of $2.2 million recordedwithin other current liabilities. The Company has committed to funding anadditional $9.3 million during the fiscal year 2004.

*Other investments*

The Company has also invested directly in a number ofprivate technology-based companies in the early stages of development. Theseinvestments are accounted for on the cost basis. The Company continuallyevaluates the carrying value of these investments for possible impairment basedon the achievement of business objectives and milestones, the financialcondition and prospects of these companies and other relevant factors. Duringthe three and six months ended June 30, 2004 and 2003, there were novaluation adjustments in respect of these private technology investments. TheCompany also invests in publicly traded technology-based companies and accountsfor these as available-for-sale securities on a fair market value basis. Therewere insignificant changes in the value of these investments for the three andsix months ended June 30, 2004 and 2003.

In July 2004, theCompany invested $3.0 million in Series D Preferred Stock, forapproximately a 2% ownership interest, in Infinera, Corp., a company thatdevelops and manufactures optical networking systems.

**14.   DEBT:**

The following represents the outstanding borrowings atJune 30, 2004 and December 31, 2003 (in thousands):
| ** **                      | ** ** | ** ** | ** ** | ** **               | ** ** | **June 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|---------------------------------|------------|------------|------------|--------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **Note**                        | ** ** | ** ** | ** ** | **Rate**                 | ** ** | **Maturity**                | ** ** | **(As Restated)(2)**       | ** ** | **(As Restated)(1)** | ** ** |
| Notes Payable                   |       | 0          | %          | July-September 2004 |       |                        | $          | 1,500                           |       |   |   | $ | 1 |   |   |
| Bank Loan                       |       | 4.94       | %          | January 2006        |       |                        | 8,155      |                            |       |   | 8,155 |   |   |
| Convertible  Subordinated Notes |       | 7/8        | %          | March 1,  2008      |       |                        | 402,500    |                            |       |   | 402,500 |   |   |
| Total Debt                      |       |       |       |                     |       |                        | $          | 412,155                         |       |   |   | $ | 410,656 |   |   |
| Long-term debt                  |       |       |       |                     |       |                        | 410,655    |                            |       |   | 410,655 |   |   |
| Short-term debt                 |       |       |       |                     |       |                        | $          | 1,500                           |       |   |   | $ | 1 |   |   |
|                                 |            |            |            |                          |            |                             |            |                                 |            |  |  |  |  |  |  |  |  |

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(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

(2)          See Note 24 to thecondensed consolidated financial statements.

Occasionally, the Company issues short-term notespayable to its vendors in lieu of trade accounts payable. The payment terms arenormally three to six months and are typically non-interest bearing. TheCompany had $1.5 million of these notes at June 30, 2004 included in othercurrent liabilities.

The Company has available borrowing facilities of$566.8 million as of June 30, 2004. $264.8 million of thesefacilities expire in 2004 and $302.0 million of these facilities expirebetween 2008 and 2010 with an interest rate of 5.31%, and the Company has notguaranteed any debt not included in the consolidated balance sheet.

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On March 12, 2003, the Company completed anoffering of $402.5 million of convertible subordinated notes due March 1,2008 to qualified buyers pursuant to Rule 144A under the Securities Act of1933. The notes bear interest at a rate of 7¤8% per annumand are convertible into the Company’s common stock at a conversion price of$23.79 per share and are subordinated to all present and future senior debt ofthe Company. Holders of the notes may convert their notes only if: (i) theprice of the Company’s common stock issuable upon conversion of a note reachesa specified threshold, (ii) specified corporate transactions occur, or (iii) thetrading price for the notes falls below certain thresholds. At the initial conversionprice, each $1,000 principal amount of notes will be convertible intoapproximately 42.0345 shares of common stock. Expenses associated with theconvertible subordinated notes issuance were $11.1 million and have beenrecorded with in other long-term assets and are being amortized over the lifeof the notes.

The Company has a bank loan in connection with apurchase of long-term asset resulting from the consolidation of MDCHolding andits affiliated entities (“MDC”). On January 10, 2003, a third partyestablished a bank loan with Shanghai Pudong Development Bank for the purchaseof the long-term asset. The Company assumed the obligations of the bank loanand related asset on January 23, 2003, which were subsequently transferredto MDC on December 31, 2003. The bank loan of $8.2 million bears interestat a rate of 4.94% per annum, and expires on January 10, 2006. At June 30,2004, the Company did not serve as legal obligor for the bank loan.

Concurrent with theissuance of the convertible notes, the Company entered into a convertible bondhedge and call option transaction at a cost of $43.8 million. The convertiblebond hedge allows the company to purchase 16,918,873 shares of its common stockat $23.79 per share from the other party to the agreement. The written calloption allows the holder to purchase 16,918,873 shares of the Company’s commonstock from the Company at $32.025 per share. Both the bond hedge and calloption transactions may be settled at the Company’s option either in cash ornet shares and expire on March 1, 2008. The Company recorded theseinstruments at cost, and their carrying value at June 30, 2004approximates their original cost. The convertible bond hedge and call optiontransactions are expected to reduce the potential dilution from conversion ofthe notes. The options have been included in stockholders’ equity in accordancewith the guidance in Emerging Issues Task Force Issue No. 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock.”

**15.**   WARRANTY OBLIGATIONS AND OTHERGUARANTEES:

Warranty obligations are as follows (in thousands):
| ** **                                              | ** ** | **Three months ended June 30,**                                                      | ** ** | **Six Months Ended June 30,**                                                        | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **        2004        ** | ** ** | **        2003        ** | ** ** | **        2004        ** | ** ** | **        2003        ** | ** ** |
| Beginning of  period                                    |       |                                                                                                     | $          | 29,524                                                                                                   |       |   |   | $ | 12,524 |   |   |   | $ | 26,267 |   |   |   | $ | 13,297 |   |   |
| Accruals for  warranties issued during the period  |       |                                                                                                     | 15,714     |                                                                                                     |       |   | 8,427 |   |   |   | 25,555 |   |   |   | 16,710 |   |   |
| Adjustments to  accruals for changes in estimates  |       |                                                                                                     | (622       | )                                                                                                        |       |   | — |   |   |   | (455 | ) |   |   | (4,552 | ) |   |
| Settlements made  during the period                     |       |                                                                                                     | (10,380    | )                                                                                                        |       |   | (4,523 | ) |   |   | (17,131 | ) |   |   | (9,027 | ) |   |
| Balance at end of period                                |       |                                                                                                     | $          | 34,236                                                                                                   |       |   |   | $ | 16,428 |   |   |   | $ | 34,236 |   |   |   | $ | 16,428 |   |   |

 

*Warrantyobligations:*

Certain of the Company’ssales contracts include provisions under which customers would be indemnifiedby the Company in the event of, among other things, a third-party claim againstthe customer for intellectual property rights infringement related to theCompany’s products. There are no limitations on the maximum potential futurepayments under these guarantees. The Company has accrued no amounts in relationto these provisions as no such claims have been made and the Company believesit has valid, enforceable rights to the intellectual property embedded in itsproducts.

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*Standby letters ofcredit:*

The Company issues standbyletters of credit primarily to support international sales activities outsideof China. When the Company submits a bid for a sale, often the potentialcustomer will require that the Company issue a bid bond or a standby letter ofcredit to demonstrate its commitment through the bid process. In addition, theCompany may be required to issue standby letters of credit as guarantees foradvance customer payments upon contract signing or performance guarantees. Thestandby letters of credit usually expire six to nine months from date ofissuance without being drawn by the beneficiary thereof. The Company may issuecommercial letters of credit in support of purchase commitments.

**16.**   COMMITMENTSAND CONTINGENCIES:

*Joint VentureFunding:*

Pursuant to the jointventure agreement with Matsushita, the Company is jointly liable for the lossesincurred in the operations of the joint venture up to the maximum of itsinvestment in the entity. At June 30, 2004, the losses had exceeded thisamount; however, the Company had accrued additional losses of approximately$1.2 million and $2.2 million during the three and six months ended June 30,2004 due to its commitment to fund an additional investment of $9.3 millionduring the fiscal year 2004.

*InvestmentCommitments:*

As of June 30, 2004,the Company had invested a total of $2.0 million in Global Asia PartnersL.P. The fund size is anticipated to be $10.1 million and the fund wasformed to make private equity investments in private or pre-IPO technology andtelecommunications companies in Asia. The Company has a commitment to invest upto a maximum of $5.0 million. The remaining amount is due at such timesand in such amounts as shall be specified in one or more future capital callsto be issued by the general partner.

*PurchaseCommitments:*

The Company is obligatedto purchase raw materials and work-in-process inventory under various ordersfrom three suppliers, all of which should be fulfilled without adverseconsequences material to the operations or financial condition of the Company.As of June 30, 2004, total open commitments under these purchase orderswere approximately $39.6 million, including $16.9 million of open purchaseorders with Fiberxon.

*Litigation:*

On October 31, 2001, a complaint was filed inUnited States District Court for the Southern District of New York against theCompany, some of its directors and officers and various underwriters for itsinitial public offering. Substantially similar actions were filed concerningthe initial public offerings for more than 300 different issuers, and the caseswere coordinated as *In re Initial PublicOffering Securities Litigation*, 21 MC 92. In April 2002,a consolidated amended complaint was filed in the matter against the Company,captioned *In re UTStarcom, Initial PublicOffering Securities Litigation*, Civil Action No. 01-CV-9604.Plaintiffs allege violations of the Securities Act of 1933 and the SecuritiesExchange Act of 1934 through undisclosed improper underwriting practicesconcerning the allocation of IPO shares in exchange for excessive brokeragecommissions, agreements to purchase shares at higher prices in the aftermarket,and misleading analyst reports. Plaintiffs seek unspecified damages on behalfof a purported class of purchasers of the Company’s common stock between March 2,2000 and December 6, 2000. The Company’s directors and officers weredismissed without prejudice pursuant to a stipulation. On February 19,2003, the Court granted in part and denied in part a motion to dismiss broughtby defendants including the Company. The order dismissed all claims against theCompany except for a claim brought under Section 11 of the 

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Securities Act of 1933,which alleges that the Company’s initial public offering registration statementcontained untrue statements of material fact and omitted to state materialfacts required to be stated in the registration statement, or necessary to makethe statements therein not misleading.

In June 2004, a stipulation of settlement andrelease of claims against the issuer defendants, including the Company, wassubmitted for preliminary approval by the Court. Under the settlement, theplaintiffs would dismiss and release all claims against participatingdefendants in exchange for a contingent payment undertaking by the insurancecompanies collectively responsible for insuring the issuer defendants in thecoordinated action, and the assignment or surrender to the plaintiffs ofcertain claims the issuer defendants may have against the underwriters.Pursuant to the undertaking, the insurers would be required to pay the amount,if any, by which $1.0 billion exceeds the total amount ultimately collected bythe plaintiffs from the non-settling defendants in the coordinated action. Thesettlement is subject to a number of conditions including Court approval.

If the settlement does not occur, and litigationagainst UTStarcom continues, the Company believes it has valid defenses andintends to defend the case vigorously. The Company is unable to currentlyestimate the loss, if any, associated with the above litigation.

The Company has filed a patent infringement suitagainst Starent Networks Corporation (“Starent”) in the U.S. District Court forthe Northern District of California. In its Complaint, the Company asserts thatStarent infringes two UTStarcom patents through the manufacture, offer forsale, and sale of Starent’s ST-16 Intelligent Mobile Gateway. On June 3,2004, the Company served its complaint on Starent. On July 30, 2004,Starent filed and served its answer and counterclaims. In its counterclaims,Starent asserts that the patents are not infringed, are invalid, and areunenforceable and asserts unfair competition against the Company. The Court isscheduled to hold an initial case management conference on October 12,2004. Although the Company cannot reliably predict the outcome of thislitigation, it believes that any liability arising from Starent’s counterclaimswill not have a material adverse effect on the business, financial condition,or results of operations of the Company.

The Company is a party toother litigation matters and claims that are normal in the course ofoperations, and while the results of such litigation matters and claims cannotbe predicted with certainty, the Company believes that the final outcome ofsuch matters will not have a material adverse impact on its financial positionor results of operations.

**17.**   STOCKHOLDERS’EQUITY:

On January 14, 2004, the Company sold12.1 million shares of common stock at $39.25 per share in a privatelynegotiated transaction to an institution, for net proceeds of approximately$474.6 million. The net proceeds are intended to fund strategic andgeneral corporate activities, including, but not limited to, acquisitions,investments, working capital or capital expenditures.

On March 12, 2004, the Company’s Board ofDirectors approved a stock repurchase program, authorizing the Company’srepurchase of up to 5,000,000 shares of its outstanding common stock over aperiod of 6 months. The Board approved an additional repurchase of 1,623,000shares in a privately negotiated transaction with an institution which wascompleted in March 2004. As of June 30, 2004, the Company repurchaseda total of approximately 3.6 million shares at a weighted average price of$30.25 per share, for a total cash outflow of $107.6 million.

For the three months endedJune 30, 2004 and 2003, the Company had $8.3 million and$30.9 million of net proceeds from the exercise of stock options,respectively. For the six months ended June 30, 2004 and 2003, the Companyhad $17.6 million and $35.0 million of net proceeds from the exerciseof stock options, respectively. Additionally, the Company issued 32,000 sharesof common stock pursuant to the 

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exerciseof a warrant at an exercise price of $2.50 per share for proceeds of $0.1million during the second quarter of 2004.

**18.**   SEGMENTREPORTING:

The Company sells wireless, wireline and switchingproduct suites to telecommunications service providers in both emerging growthand established telecommunications markets around the world. The Companyprimarily operates in two geographic areas, China and other regions. The chiefoperating decision makers evaluate performance, make operating decisions, andallocate resources based on consolidated financial data. Gross profit,operating income, income from operations, and income taxes are not allocated tospecific individual departments within the organization. In accordance withSFAS No. 131 “Disclosures about Segments of an Enterprise and RelatedInformation,” the Company is considered a single reportable segment. TheCompany is required to disclose certain information about product revenues,information about geographic areas, information about major customers, andinformation about long-lived assets.

China sales accounted for 90% and 91% of net sales forthe three and six months ended June 30, 2004, respectively, and 82% of netsales for both the three and six months ended June 30, 2003. The Companygroups all of its China customers together by province and treats each provinceas one customer since that is the level at which purchasing decisions are made.At June 30, 2004 and 2003, there were approximately 30 and 31 suchcustomers, respectively. Giving effect to this consolidation, the Jiangsu andHei Long Jiang provinces accounted for 15% and 10% of net sales, respectively,for the three months ended June 30, 2004. The Hei Long Jiang, Zhejiang andHebei provinces accounted for 13%, 11% and 10% of net sales, respectively, forthe three months ended June 30, 2003. The Guangdong, Jiangsu and Hei LongJiang provinces accounted for 16%, 11% and 10%, of net sales, respectively, forthe six months ended June 30, 2004. The Hei Long Jiang province accountedfor 13% of net sales for the six months ended June 30, 2003.

Geographical area and product sales data are asfollows (in thousands):
| ** **                   | ** ** | **Three months ended June 30,** | ** ** | ** ** | ** ** | **Six months ended June 30,** | ** ** | ** ** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **2004**                                            | ** ** | ** ** | ** ** | **2003**                                          | ** ** | ** ** | ** ** | **2004** | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** **                                          | ** ** | ** ** | ** ** | **(in thousands)**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ***Sales  by region***       |       |                                                |       |       |       |                                              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| China                        |       |                                                | $          | 618,323    |       |                                              | 90         | %          | $          | 332,548 |   | 82 | % | $ | 1,188,889 |   | 91 | % | $ | 601,478 |   | 82 | % |
| Japan                        |       |                                                | 22,104     |       |       | 3                                                 | %          | 60,546     |       | 15 | % | 41,531 |   | 3 | % | 120,366 |   | 16 | % |
| Other                        |       |                                                | 49,201     |       |       | 7                                                 | %          | 12,740     |       | 3 | % | 81,499 |   | 6 | % | 14,510 |   | 2 | % |
| **TOTAL  NET SALES**         |       |                                                | $          | 689,628    |       |                                              | 100        | %          | $          | 405,834 |   | 100 | % | $ | 1,311,919 |   | 100 | % | $ | 736,354 |   | 100 | % |
| ***Sales  by product line*** |       |                                                |       |       |       |                                              |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Wireless  infrastructure     |       |                                                | $          | 427,659    |       |                                              | 62         | %          | $          | 143,490 |   | 35 | % | $ | 764,176 |   | 58 | % | $ | 267,850 |   | 36 | % |
| Subscriber  handsets         |       |                                                | 194,313    |       |       | 28                                                | %          | 187,128    |       | 46 | % | 430,733 |   | 33 | % | 327,088 |   | 44 | % |
| Wireline products            |       |                                                | 67,656     |       |       | 10                                                | %          | 75,216     |       | 19 | % | 117,010 |   | 9 | % | 141,416 |   | 20 | % |
| **TOTAL NET SALES**          |       |                                                | $          | 689,628    |       |                                              | 100        | %          | $          | 405,834 |   | 100 | % | $ | 1,311,919 |   | 100 | % | $ | 736,354 |   | 100 | % |

 

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Long-lived assets by geography, consisting ofproperty, plant and equipment, goodwill and intangible assets, are as follows(in thousands):
| ** **              | ** ** | **June 30,**         | ** ** | **December 31,**     | ** ** |
|-------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **              | ** ** | **2004**                  | ** ** | **2003**                  | ** ** |
| ** **              | ** ** | **(As Restated)(2)** | ** ** | **(As Restated)(1)** | ** ** |
| U.S.                    |       |                      | $          | 143,894                   |       |   |   | $ | 155,240 |   |   |
| Foreign                 |       |                      | 268,875    |                      |       |   | 184,407 |   |   |
| Total long-lived assets |       |                      | $          | 412,769                   |       |   |   | $ | 339,647 |   |   |

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(1)          See the Company’s filingon Form 10-K/A filed with the SEC.

(2)          SeeNote 24 to the condensed consolidated financial statements.

**19.**   RELATEDPARTY TRANSACTIONS:

*Softbank*

The Company recognized revenue of $21.1 millionand $32.6 million for the three and six months ended June 30, 2004,respectively, and $60.2 million and $118.7 million for the three and six monthsended June 30, 2003, respectively, with respect to sales oftelecommunications equipment to SBBC, an affiliate of SOFTBANKAmerica Inc., which is a significant stockholder of the Company. SBBCoffers asynchronous digital subscriber line (“ADSL”) coverage throughout Japan,which is marketed under the name “YAHOO BB!”. The Company provides ADSLtechnology to SBBC. The contract was competitively bid and the terms of thiscontract were on terms no more favorable than those with unrelated parties.Included in accounts receivable at June 30, 2004 and December 31,2003 were $29.9 million and $43.9 million, respectively, related to thisagreement. There were insignificant amounts included in deferred revenue inrespect of this agreement at June 30, 2004 and no amounts included indeferred revenue in respect of this agreement at December 31, 2003.

The Company has invested in Softbank China andRestructuring Fund No. 1, which are investment vehicles established bySOFTBANK CORP and its affiliates. See Note 13.

On July 17, 2003, the Company entered into aMezzanine Loan Agreement with BB Modem Rental PLC (“BB Modem”), an affiliate ofSOFTBANK America, Inc. Under the terms of the agreement the Company loanedBB Modem $10.1 million at an effective interest rate of 12.01% per annum, forthe purposes of investing in a portfolio of ADSL modems and associated modemrental agreements, from SOFTBANK BB CORP., formerly BB Technologies, anaffiliate of SOFTBANK America, Inc. SOFTBANK BB CORP. will continue toservice such modems and modem rental agreements. The Company’s loan issubordinated to certain senior lenders of BB Modem, and repayments are payableto the Company over a forty-two month period through January 31, 2007,with a substantial portion of the principal amount of the loan schedule to berepaid during the last 16 months of this period. The Company’s recourse fornonpayment of the loan is limited to the assets of BB Modem, the account intowhich subscriber payments are made and its rights under the securitizationtransaction documents. The value of BB Modem’s modems that serve as collateralfor the loan may decrease over time and may not be sufficient upon sale to paythe outstanding amounts on the loans. The Company assesses the loan forimpairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. The Company periodically reviews theunderlying quality of the asset pool securing the loan to assess whetherimpairment has incurred and needs to be recorded. During three and six monthsended June 30, 2004, the Company recorded $0.3 million and $0.7 million,respectively, in interest income in respect of this loan. The loan receivableat June 30, 2004 was approximately $11.2 million and is included in otherlong-term assets.

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On April 5, 2003, theCompany repurchased 8.0 million shares of common stock beneficially ownedby SOFTBANK America Inc., at a purchase price of $17.385 per share. Thetotal cost of the repurchase was $139.6 million including transactionfees. In connection with this repurchase transaction, SOFTBANKAmerica Inc. entered into an agreement with the Company not to offer, sellor otherwise dispose of the Company’s common stock for a period of one year,subject to a number of exceptions. As of June 30, 2004, SOFTBANKAmerica Inc. beneficially owned approximately 12.9% of the Company’soutstanding stock.

*Cellon*

In October 2002, theCompany entered into a license and a royalty agreement with CellonInternational Holding Corporation (“Cellon”), in which the Company has a 9%ownership interest. The Company paid $0.8 million to license certain technologyfor the development of certain handset products in China. Per the terms of theroyalty agreement, the Company is required to pay Cellon $3 per unit shippedfor a minimum of 0.5 million units. This agreement is not material to theoverall financial results of Cellon. The Company has evaluated its relationshipwith Cellon under FASB Interpretation (“FIN”) 46, Consolidation of VariableInterest Entities, and determined that consolidation is not necessary.

*Fiberxon*

The Company has anoutstanding purchase commitment with Fiberxon, in which the Company has an 11%ownership interest, to purchase component parts for optical networkingproducts. In addition, the Company provided a letter of credit for $5.0 millionto purchase raw materials for the manufacture of these component parts. Thiscommitment should be fulfilled without adverse consequences material to theoperations or financial condition of the Company. As of June 30, 2004,total open commitments under these purchase orders were $16.9 million, whichare due at the end of this year.

*Starcom Products, Inc.*

TheCompany obtains engineering consulting and employee placement services fromStarcom Products, Inc. (“Starcom”), which is 31% owned by an individualrelated to a member of the Company’s Board of Directors. The Company paid $0.2million and $0.4 million for the three months ended June 30, 2004 and2003, respectively, for engineering consulting and employee placement servicesfrom Starcom. The Company paid $0.4 million and $0.6 million for the six monthsended June 30, 2004 and 2003, respectively, for engineering consulting andemployee placement services from Starcom.

**20.**   COUNTRYRISKS:

Approximately 90% and 91% of the Company’s net salesfor the three and six months ended June 30, 2004 and 82% for both thethree and six months ended June 30, 2003, respectively, were made inChina. Accordingly, the Company’s business, financial condition and results ofoperations are likely to be influenced by the political, economic and legalenvironment in China and by the general state of China’s economy. As such, theCompany’s operations in China are subject to special considerations andsignificant risks not typically associated with companies in the United States.The Company’s results may be adversely affected by, among other things, changesin the political, economic, competitive and social conditions in China,including changes in governmental policies with respect to laws andregulations, changes in China’s telecommunications industry and regulatory rules andpolicies, anti-inflationary measures, currency conversion and remittanceabroad, and rates and methods of taxation.

Under China’s current regulatory structure, thecommunications products that the Company offers in China must meet governmentand industry standards, and a network access license for the equipment must beobtained. Without the license, the equipment may not be connected to publictelecommunications networks or sold in China. Moreover, the Company must ensurethat the quality of the 

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telecommunicationsequipment for which it has obtained a network access license is stable andreliable, and may not lower the quality or performance of other installedlicensed products. China’s State Council’s product quality supervisiondepartment, in concert with China’s Ministry of Information Industry, performsspot checks to track and supervise the quality of licensed telecommunicationsequipment and publishes the results of such spot checks.

Approximately 3% of theCompany’s sales for both the three and six months ended June 30, 2004 andapproximately 15% and 16% of the Company’s sales for the three and six monthsended June 30, 2003, respectively, were made in Japan. Accordingly, thepolitical, economic and legal environment and the general state of Japan’seconomy may influence the Company’s business, financial condition and resultsof operations.

**21.   INCOMETAX ASSETS AND LIABILITIES:**

Inestablishing its deferred income tax assets and liabilities, the Company makesjudgments and interpretations based on the enacted tax laws and published taxguidance applicable to its operations. The Company records deferred tax assetsand liabilities and evaluates the need for valuation allowances to reduce thedeferred tax assets to realizable amounts. The likelihood of a material changein the Company’s expected realization of these assets is dependent on futuretaxable income, its ability to use foreign tax credit carryforwards andcarrybacks, and the effectiveness of its tax planning strategies in the variousrelevant jurisdictions. Changes to the Company’s income tax provision or in thevaluation of the deferred tax assets and liabilities may affect its annualeffective income tax rate.

**22.   ACCOUNTINGFOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:**

TheCompany uses derivative financial instruments to manage its exposures toforeign currency exchange rate changes. The derivative instruments areaccounted for pursuant to SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended by SFAS No. 138, “Accountingfor Certain Derivative Instruments and Certain Hedging Activities.” As amended,SFAS No. 133 requires that an entity recognize all derivatives aseither assets or liabilities on the balance sheet, measure those instruments atfair value and recognize changes in the fair value of derivatives in earningsin the period of change unless the derivative qualifies as an effective hedgethat offsets certain exposures. Such contracts are designated at inception tothe related foreign currency exposures being hedged. Beginning in the firstquarter of 2004, the Company hedges certain of its Japanese Yen-denominatedbalance sheet exposures against future movements in foreign currency exchangerates by using foreign currency forward contracts. Hedged transactions aredenominated in U.S. dollars on behalf of these transactions denominated inJapanese Yen. Pursuant to its foreign currency exchange hedging policy, theCompany may hedge anticipated transactions and the related payables denominatedin foreign currencies using forward foreign currency exchange rate contracts. Gainsand losses on these fair value hedges are intended to offset gains and lossesfrom the revaluation of Japanese Yen-denominated recognized liabilities. Thenet result of these gains and losses on contracts and revaluation included ininterest and other income (expense) was insignificant for the three and sixmonths ended June 30, 2004. The Company’s foreign currency forwardcontracts generally mature within three months. These derivative financialinstruments are not held for trading purposes. There were no foreign currencyforward contracts open at June 30, 2004.

**23.**   RECENT ACCOUNTING PRONOUNCEMENTS:

In November 2003, the EITF issued EITF No. 03-6“Participating Securities and the Two-Class Method under FASBStatement No. 128,” which provides for a two-class method of calculatingearnings per share computations that relate to certain securities that would beconsidered to be participating in conjunction with certain common stock rights.This guidance was applicable to the 

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Company starting with thesecond quarter beginning April 1, 2004. The Company evaluated the impactof this pronouncement and determined that there was no effect on its financialstatements.

On April 9,2004, the FASB issued FASB Staff Position (“FSP”) to SFAS 129-1, DisclosureRequirements under FASB Statement No. 129, Disclosure of Information aboutCapital Structure, Relating to Contingently Convertible Securities to providedisclosure guidance for contingently convertible securities, including thoseinstruments with contingent conversion requirements that have not been met andotherwise are not required to be included in the computation of dilutedearnings per share. The FSP addresses concerns that disclosures relating tocontingently convertible securities are inconsistent between companies or maybe inadequate. FSP SFAS 129-1 states that to comply with the requirements ofSFAS 129, the significant terms of the conversion features of thecontingently convertible security should be disclosed to enable users offinancial statements to understand the circumstances of the contingency and thepotential impact of conversion. The Company evaluated the impact of thispronouncement and has enhanced its disclosures as required. Refer to Note 3,Earnings Per Share.

**24.**   RESTATEMENT OF FINANCIAL STATEMENTS:

As part of the financial closing process for the yearended December 31, 2004, the Company identified certain prior year errorsresulting in a restatement which decreased the provision for income taxes andincreased net income by $20.7 million for the year ended December 31,2003. In addition, as a result of the correction of the tax provision, retainedearnings was increased by $20.7 million, additional paid-in capital wasincreased by $0.9 million, income taxes payable was decreased by $2.5 million,other long-term assets were increased by $21.6 million, prepaids were increasedby $2.8 million and other current assets were reduced by $5.3 million, all asof December 31, 2003. There was no net effect on cash provided fromoperating activities as a result of this error.

Theimpact of the restatement on each of the respective quarters in 2003 is asfollows (in thousands):
| ** **                                      | ** ** | **Decrease in Income   Tax Expense** | ** ** | **Decrease in Income   Tax Payable** | ** ** | **Increase in   Net Income** | ** ** | **Increase in   Diluted EPS** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| For the three months ended: |       |                                                     |       |                                                     |       |                                        |       |                                         |       |   |   |   |   |   |   |   |   |
| March 31,  2003                            |       |                                                     | $          | 3,825                                                    |       |                                        |       | $                                            | 3,825      |   |   |   | $ | 3,825 |   |   |   | $ | 0.04 |   |   |
| June 30,  2003                             |       |                                                     | $          | 4,038                                                    |       |                                        |       | $                                            | 4,038      |   |   |   | $ | 4,038 |   |   |   | $ | 0.03 |   |   |
| September 30, 2003                         |       |                                                     | $          | 6,064                                                    |       |                                        |       | $                                            | 6,064      |   |   |   | $ | 6,064 |   |   |   | $ | 0.04 |   |   |

 

During the evaluation of the errors related to theincome tax provision, the Company determined that an additionalreclassification of reported 2003 results was required. Specifically, cost ofsales and other income both increased by $3.5 million for the year ended December 31,2003 to properly classify certain incentive payments received for exports andvalue-added taxes in China. This adjustment related solely to the fourthquarter of 2003.

In addition to the errors in the 2003 tax provision,the Company had not correctly identified a related party that is deemed avariable interest entity and for whom the Company is considered the primarybeneficiary in accordance with FASB Interpretation No. 46 (“FIN 46”). TheCompany has corrected its 2003 financial statements to reflect theconsolidation of this variable interest entity, MDC Holding Limited (“MDCHolding”) and its affiliated entities (MDC Holding and such affiliated entitiesare referred to, collectively, as “MDC”). At December 31, 2003, thisconsolidation resulted in a $5.5 million increase in total assets and a $0.7million increase in total liabilities. There was no effect on net income as aresult of this consolidation. The consolidation occurred upon the Company’sadoption of FIN 46 at the beginning of the fourth quarter of 2003.

Furthermore, an impairment charge of $7.4 million, netof taxes of $1.3 million, was recorded to reflect an impairment of MDCequipment subject to a revenue share arrangement. Due to the 

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uncertainties surroundingthe customer’s subscriber income and ability to pay under this arrangement, theCompany determined that an impairment charge should have been recorded in thefourth quarter of 2003 when these conditions should have been identified. Accordingly,an impairment charge of $7.4 million, net of tax, was recorded, which decreasedboth total assets and equity by $7.4 million at December 31, 2003. Thisadjustment was recorded in the fourth quarter of 2003.

The Companyidentified certain revisions in classification during the preparation of the2003 restated financial statements. Therefore, for the consolidated financialstatements for the quarter ended June 30, 2004, the following adjustmentswere made to conform to the 2003 restated financial statements:

(1)         Cost of sales for relatedparty revenue transactions is presented separately from cost of sales fornon-related party revenue transactions for all periods presented;

(2)         A related party which is31% owned by an individual related to a member of the Company’s Board ofDirectors and associated transactions have been identified. See Note 19 to theConsolidated Financial Statements.

On April 13, 2005, the Company filed Amendment No. 1to its Annual Report on Form 10-K/A for the year ended December 31,2003 to reflect the impact of the restatement on its consolidated financialstatements for the year then ended and for the quarters ended March 31,2003, June 30, 2003 and September 30, 2003.

The results of operations for the year ended December 31,2004 and the results of operations for each of the quarters ended March 31,2004, June 30, 2004 and September 30, 2004 have not been impacted bythe restatements of 2003 financial results discussed above. However, thebeginning and ending balances of certain accounts for the period ended June 30,2004 were affected and therefore have been adjusted in this Amendment No. 1to reflect the 2003 restatements.

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Thefollowing table shows the effect on the line items of the adjustments and otherrevisions in classification resulting from the 2003 restatements in thecomparative consolidated financial statements (in thousands, except per sharedata):
| ** **                                                                     | ** ** | **As Previously** | ** ** | **As**       | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|--------------|------------|
| ** **                                                                     | ** ** | **Reported**           | ** ** | **Restated** | ** ** |
| **Balance Sheets, as of  June 30, 2004:**                                 |       |                   |       |         |       |
| Current assets:                                                                |       |                   |       |         |       |
| Cash and cash equivalents                                                      |       | $                      | 484,767    |         | $          | 488,540 |   |
| Accounts receivable, net of allowances for doutful  accounts                   |       | 509,608                |       | 509,975      |       |
| Inventories                                                                    |       | 435,552                |       | 435,579      |       |
| Deferred costs/Inventories at customer sites under  contract                   |       | 335,640                |       | 318,723      |       |
| Prepaids                                                                       |       | 117,995                |       | 120,836      |       |
| Other current assets                                                           |       | 39,147                 |       | 35,238       |       |
| Property, plant  and equipment                                                 |       | 226,009                |       | 226,972      |       |
| Other long-term  assets                                                        |       | 47,735                 |       | 77,682       |       |
| Current  liabilities:                                                          |       |                   |       |         |       |
| Accounts payable                                                               |       | 389,094                |       | 389,040      |       |
| Income taxes payable                                                           |       | 28,106                 |       | 25,591       |       |
| Customer advances                                                              |       | 149,243                |       | 141,088      |       |
| Other current liabilities                                                      |       | 205,137                |       | 205,909      |       |
| Long-term debt                                                                 |       | 402,500                |       | 410,655      |       |
| Minority interest  in consolidated subsidiaries                                |       | 647                    |       | 5,396        |       |
| Stockholders’  equity:                                                    |       |                   |       |         |       |
| Additional paid-in capital                                                     |       | 1,114,632              |       | 1,115,491    |       |
| Retained earnings                                                              |       | 255,385                |       | 268,666      |       |
| **Statements of Cash Flows, for the six months  ended June 30, 2004:**    |       |                   |       |         |       |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF PERIOD                              |       | 373,974                |       | 377,747      |       |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                    |       | 484,767                |       | 488,540      |       |
| **Statements of Operations, for the three months  ended June 30, 2003:**  |       |                   |       |         |       |
| Income tax  expense                                                            |       | 13,138                 |       | 9,100        |       |
| Net income                                                                     |       | 39,412                 |       | 43,450       |       |
| Earnings per  share                                                            |       |                   |       |         |       |
| Basic                                                                          |       | 0.39                   |       | 0.43         |       |
| Diluted                                                                        |       | 0.33                   |       | 0.36         |       |
| **Statements of Operations, for the six months  ended June 30, 2003:**    |       |                   |       |         |       |
| Income tax  expense                                                            |       | 25,585                 |       | 17,722       |       |
| Net income                                                                     |       | 76,755                 |       | 84,618       |       |
| Earnings per  share                                                            |       |                   |       |         |       |
| Basic                                                                          |       | 0.74                   |       | 0.81         |       |
| Diluted                                                                        |       | 0.65                   |       | 0.72         |       |
| **Statements of Cash Flows, for the six months  ended June 30, 2003:**    |       |                   |       |         |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                         |       |                   |       |         |       |
| Net income                                                                     |       | 76,755                 |       | 84,618       |       |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                   |       |         |       |
| Changes in operating assets and liabilities:                                   |       |                   |       |         |       |
| Income taxes  payable                                                          |       | (8,122                 | )          | (15,985      | )          |
|                                                                                |            |                        |            |              |            |  |  |

 

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**ITEM2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**FORWARD-LOOKING STATEMENTS**

This Report on Form 10-Qcontains forward-looking statements within the meaning of the federalsecurities laws. These statements are based on information that is currentlyavailable to management. We intend such forward-looking statements to becovered by the safe harbor provisions of the Private Securities LitigationReform Act of 1995, and we are including this statement for purposes of complyingwith those provisions. The forward-looking statements include, withoutlimitation, those concerning the following: our expectations as to the natureof possible trends, including our expectations about continuing growth in thenumber of subscribers for telecommunications products in other countries inwhich we do business; our expectations regarding continued growth in ourbusiness and operations; our expectation that there will be fluctuations in ouroverall gross profit, gross margin, product mix, quarter to quarter results,customer base and selling prices; our plans for expanding the direct salesorganization and our selling and marketing campaigns and activities; ourexpectation that we may use our cash, debt or securities to acquire or investin complementary businesses, technologies or product offerings; ourexpectations regarding trends in customer acceptance of our products; ourexpectation that there will be increases in selling, marketing, research anddevelopment, and general and administrative expenses; our expectationsregarding future growth of our business and operations; our expectationsregarding our ability to take advantage of strategic investment opportunities;our expectation that we will continue to invest significantly in research anddevelopment; our expectations regarding the status of products underdevelopment; our expectations about anticipated Sarbanes-Oxley compliance costsand our compliance with that Act; our expectations regarding our futureinvestments; our expectations regarding our future levels of cash and cashequivalents, as well as our expectation that existing cash and cash equivalentswill be sufficient to finance our operations for the foreseeable future; ourexpectations regarding licensing requirements and our ability to receivelicenses in China for our PAS system and other products; our expectationsregarding the development of 3G networks; our expectations regarding the impactof a reorganization of China Netcom International Corporation Ltd. (“China Netcom”);our expectation that our business will continue to be significantly influencedby the political, economic and legal environment in China, as well asexpectations about the nature of political, economic and legal reform in China;our expectations regarding the future allocation of net sales by product group;our expectations regarding efficiencies we hope to achieve in supply chainmanagement and inventory purchasing, as well as trends in inventory growth; andour expectations regarding our expansion into new markets around the world.Additional forward-looking statements may be identified by the words, “anticipate,”“expect,” “believe,” “intend,” “will” and similar expressions, as they relateto us or our management. Investors are cautioned that these forward-lookingstatements are inherently uncertain. These statements are subject to risks anduncertainties that may cause actual results and events to differ materially.For a detailed discussion of these risks and uncertainties, see the “FactorsAffecting Future Operating Results” section of this Form 10-Q. We donot guarantee future results and undertake no obligation to update theforward-looking statements to reflect events or circumstances occurring afterthe date of this Form 10-Q.

**RESTATEMENT**

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operations,presented in comparative format, gives effect to the 2003 restatement discussedin Note 24 to the consolidated financial statements included in Item I.

**EXECUTIVE SUMMARY**

We design, manufacture and sell telecommunicationsequipment and products and provide services associated with their operation.Our products are deployed and installed globally primarily by wireless and 

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wirelinetelecommunications service providers. We provide an extensive range of productsfor transportation of voice, data and video traffic for these serviceproviders. We are currently operating in China, Japan, India, the Central andLatin American region, North America, the European, Middle Eastern and Africanregion and southeastern and northern Asia.

We differentiate ourselves with products designed toreduce network complexity, integrate high performance capabilities and allow asimple transition to next generation networks. We design our products tofacilitate cost-effective and efficient deployment, maintenance and upgrades.

Our technologiesand products fall into these major categories:

·       wirelessinfrastructure, a technology that enables end users, or subscribers, to sendand receive data, voice and media while mobile and using wireless devices;

·       wirelineinfrastructure, a technology that enables subscribers to send and receive data,voice and media transport and carriage in a fixed location; and

·       subscriberterminal products, including handsets and customer premise equipment (“CPE”),which receive data, voice and media transmissions.

Historically, substantially all of our sales have beento service providers in China. 90% and 91% of our sales for the three and sixmonths ended June 30, 2004, respectively, were derived from China. For thethree and six months ended June 30, 2004, we had $618.3 million and $1.2billion of revenue, respectively, an 86% and 98% increase over thecorresponding periods in 2003. This growth in revenue was driven by China’scontinued demand for our products and services to meet the needs of itsincreased subscriber base and its expanding telecommunications market. We usesubscriber growth statistics to gauge future inventory purchasing requirementsas well as to forecast our anticipated revenue growth. We expect thissubscriber growth to continue throughout 2004 since China’s teledensity rates,or the number of telephones per person in a region, remain low in comparison tothat of developed countries. However, we do expect this growth to be at aslower rate than the first half of the year.

The number of competitors for communications accessand switching systems and handsets in China has grown in line with China’sgrowing telecommunications market. This growth has led to competitive pricingpressure, causing average selling prices to decrease during the three and sixmonths ended June 30, 2004 relative to those in the comparative period in2003. This pricing pressure affected both our infrastructure and handset productlines, contributing to lower margins overall.

We strive to develop products with more advancedfeatures and to enhance the features of our existing products, which we believewill enable us to offer our customers more advanced products at higher average sellingprices than otherwise would be possible in the future sale. In addition, duringthe first half of 2004, we continued to strive to reduce the cost ofmanufacturing our products by streamlining our design functions.

During the second quarter2004, we signed approximately $300 million of international sales contracts,and we intend to continue to expand our global sales outside of China. Weexpect to recognize the majority of revenue from these contracts during thesecond half of 2004. International deployments for the second quarter of 2004were delayed by longer-than-average delivery times. As we expand, we need toimprove our supply chain and inventory management processes to ensure timelydeliveries. We engaged consultants to assist with these efforts, and expect toreduce our delivery times as a result of these improvements.

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***KEY TRANSACTIONS***

***Acquisitions***

During the second quarterof 2004, we closed two acquisitions and announced a third acquisition withAudiovox, which we anticipate will close in the fourth quarter of 2004. Weconsider all three of these acquisitions to be important elements of ourlong-term global wireless strategy. Specifically, they provide the corefeatures of our new code division multiple access (or “CDMA”) productportfolio.

*TELOS Technology, Inc.*

On May 19, 2004, we completed the acquisition ofsubstantially all of the assets and certain liabilities of TELOS Technology, Inc.(“TELOS”) and its subsidiaries. TELOS is a provider of mobile switchingproducts and services for voice and data communication networks to developingrural, enterprise and emerging wireless markets. The total consideration forthe acquisition, funded from cash on hand, was approximately $30.3 million. Wepaid $29.0 million in cash, in addition to $1.3 million of acquisition-relatedtransaction costs. Within one year of the acquisition date, additional paymentstotaling a maximum of $19.0 million may become payable based upon revenuerecognized from the sale of TELOS products. In the event these revenue milestonesare met, the original purchase price will be adjusted for the amount of thecontingent payment in accordance with Statement of Financial AccountingStandards No. 141 (“SFAS 141”), “Business Combinations.”

The existing technologyacquired included the entire TELOS product family of CDMA softswitch technologyproducts, supporting servers and operations maintenance centers. CDMAtechnology is the common platform on which third-generation wireless dataservices and applications are built. By assigning unique codes to eachcommunication to differentiate it from others in the same spectrum, CDMAtechnology allows many users to occupy the same time and frequency allocationsin a given band or space. The TELOS product line will be integrated with oursuite of CDMA products, strengthening our existing CDMA product andinfrastructure portfolio. In addition to developed product technology, theCompany acquired fixed assets, in-process research and development (“IPR&D”),an assembled workforce of approximately 60 employees, customer relationshipsand goodwill.

*Hyundai Syscomm, Inc.*

On April 27, 2004, we completed the acquisitionof the assets, substantially all of the intellectual property, certainemployees and certain contracts related to Hyundai Syscomm, Inc.’s (“HSI”)CDMA infrastructure business for markets outside of Korea. Subject to theattainment of certain milestones and the transfer of certain know-how, thetotal consideration for this transaction was approximately $12.3 million,excluding transaction costs of $1.8 million. There was $7.3 million in cashpayable at the closing date and an additional $3.0 million in cash payable oneyear from the closing date. The remaining purchase price was comprised of $2.0million payable upon the completion of technical training by HSI employees toour manufacturing staff in China under the terms of a Training ServicesAgreement and $1.8 million of transaction costs. Not included in the purchaseprice was $2.0 million payable upon the completion of certain revenue milestones.In the event these revenue milestones are met, the original purchase price willbe adjusted for the amount of the contingent payment in accordance with SFAS141.

Under the terms of the transaction with HSI, weacquired existing technologies and entered into non-compete and licensingagreements. The existing technologies acquired were the base transceiverstation (“BTS”) and base station controllers (“BSC”) product lines. BTS is theantenna and radio equipment that enables wireless devices to communicate with aland-based transmission network in a given range. BSC performs radio signalmanagement functions for BTS, managing functions such as frequency assignmentand handoff. As part of the asset purchase agreement, we entered into atraining services agreement with HSI, whereby HSI employees will providetechnical training to our manufacturing staff in China for the 

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sixth-month periodsubsequent to the acquisition. This technology and technological know-how willstrengthen our CDMA existing product portfolio and the development of futureCDMA technology.

In addition to acquiringexisting technology, we entered into non-compete and licensing agreements. Thenon-compete agreement prohibits HSI from competing against us in all countriesexcept Korea for four years from the valuation date. The licensing agreementrequires that HSI pay us 1% of revenue as royalty for the usage of theintellectual property that we acquired under the terms of the acquisition forfifteen years subsequent to the valuation date.

*AudiovoxCommunications, Inc.*

On June 14, 2004, weannounced an agreement to acquire select assets of Audiovox CommunicationsCorporation (“Audiovox”), the wireless handset division of AudiovoxCorporation. We will acquire select assets and liabilities, includinginventories, prepaids, third-party payables, accrued expenses and the right tohire approximately 270 employees for $165.1 million in cash. We will acquirethe Audiovox’s sales, service and support infrastructure, its CDMA handsetbrand, access to supply-chain channels, product marketing expertise and keyrelationships with CDMA operators primarily in North and South America. Closingof the transaction is subject to satisfaction of certain conditions outlined inthe purchase agreement.

***Stockholders’ Equity***

On March 12, 2004,our Board of Directors approved a stock repurchase program, authorizing therepurchase of up to 5,000,000 shares of our outstanding common stock over aperiod of 6 months. The Board approved an additional repurchase of 1,623,000 sharesin a privately negotiated transaction with an institution. As of June 30,2004, we repurchased a total of approximately 3.6 million shares under thisprogram at an average price of $30.25 per share, for a total cash outflow of$107.6 million.

***Transactions with Softbank and Affiliated Entities***

We recognized revenue of $21.1 million and $32.6million for the three and six months ended June 30, 2004, respectively,and revenue of $60.2 million and $118.7 million for the three and six monthsended June 30, 2003, respectively with respect to sales oftelecommunications equipment to Softbank BB Corporation (“SBBC”), an affiliateof SOFTBANK CORP. and SOFTBANK America Inc., a significant stockholder ofours. SBBC offers asynchronous digital subscriber line (“ADSL”) coveragethroughout Japan, which is marketed under the name “YAHOO BB!”. The majority ofthe products we provide to SBBC is associated with ADSL technology. Thecontract was competitively bid and the terms of this contract were on terms nomore favorable than those with unrelated parties. Included in accountsreceivable at June 30, 2004 and December 31, 2003 were $29.9 millionand $43.9 million, respectively, related to this agreement. There wereinsignificant amounts included in deferred revenue in respect to this agreementat June 30, 2004 and no amounts included in deferred revenue in respect tothis agreement at December 31, 2003.

During 2000, we invested $10.0 million inSoftbank China, an investment fund established by SOFTBANK CORP. focused on investmentsin Internet companies in China. This investment is intended to enable us toparticipate in the anticipated growth of Internet-related businesses in China.Our investment constitutes 10% of the funding for Softbank China, with SOFTBANKCORP. contributing the remaining 90%. The fund has a separate management team,and none of our employees are employed by the fund. Many of the fund’sinvestments are and will be in privately held companies, many of which arestill in the start-up or development stages. These investments are inherentlyrisky as the market for the technologies or products the companies have underdevelopment are typically in the early stages and may never materialize. Weaccount for this investment under the cost method and recorded no losses and 

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insignificant losses inthe carrying value of this investment during the three and six months ended June 30,2004, respectively. We recorded insignificant losses and losses of $0.1 milliondue to an other-than-temporary decline in the carrying value of this investmentduring the three and six months ended June 30, 2003, respectively. Thebalance in this investment was $5.3 million at June 30, 2004.

On July 17, 2003, we entered into a MezzanineLoan Agreement with BB Modem Rental PLC (“BB Modem”), an affiliate of SOFTBANKAmerica, Inc. Under the terms of the agreement we loaned BB Modem $10.1million at an effective interest rate of 12.01% per annum, for the purposes ofinvesting in a portfolio of ADSL modems and associated modem rental agreements,from SOFTBANK BB CORP., formerly BB Technologies, an affiliate of SOFTBANKAmerica, Inc. SOFTBANK BB CORP. will continue to service such modems andmodem rental agreements. Our loan is subordinated to certain senior lenders ofBB Modem, and repayments are payable to us over a forty-two month periodthrough January 31, 2007, with a substantial portion of the principalamount of the loan schedule to be repaid during the last 16 months of thisperiod. Our recourse for nonpayment of the loan is limited to the assets of BBModem, the account into which subscriber payments are made and its rights underthe securitization transaction documents. The value of BB Modem’s modems thatserve as collateral for the loan may decrease over time and may not besufficient upon sale to pay the outstanding amounts on the loans. We assess theloan for impairment whenever events or changes in circumstances indicate thatthe carrying amount may not be recoverable. We periodically review theunderlying quality of the asset pool securing the loan to assess whetherimpairment has incurred and needs to be recorded. During three and six monthsended June 30, 2004, we recorded $.3 million and $.7 million,respectively, in interest income in respect of this loan. The loan receivableat June 30, 2004 was approximately $11.2 million and is included in otherlong-term assets.

During the first quarter of fiscal 2002, we invested$2.0 million in Restructuring Fund No. 1, a venture capitalinvestment limited partnership established by SOFTBANK INVESTMENT CORP., anaffiliate of SOFTBANK CORP. The fund focuses on leveraged buyout investments incompanies in Asia undergoing restructuring or bankruptcy proceedings. The totalfund offering is expected to be between approximately $150.0 million and$226.0 million, with each investor contributing a minimum of$0.8 million. The fund has a separate management team, and none of ouremployees are employed by the fund. We account for this investment under theequity method of accounting. The balance in this investment was$1.8 million at June 30, 2004.

On April 5, 2003, werepurchased 8.0 million shares of our common stock beneficially owned bySOFTBANK America Inc., at a purchase price of $17.385 per share. The totalcost of the repurchase was $139.6 million including transaction fees. Inconnection with this repurchase transaction, SOFTBANK America Inc. enteredinto an agreement with us not to offer, sell or otherwise dispose of our commonstock for a period of one year, subject to a number of exceptions. As of June 30,2004, SOFTBANK America Inc. beneficially owned approximately 12.9 % of ouroutstanding stock.

***Starcom Products, Inc.***

We obtain engineeringconsulting and employee placement services from Starcom Products, Inc. (“Starcom”),which is 31% owned by an individual related to a member of our Board ofDirectors. We paid $0.2 million and $0.4 million for the three months ended June 30,2004 and 2003, respectively, for engineering consulting and employee placementservices from Starcom. We paid $0.4 million and $0.6 million for the six monthsended June 30, 2004 and 2003, respectively, for engineering consulting andemployee placement services from Starcom.

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**RESULTS OF OPERATIONS**

Our net sales consist of product and service saleswithin three broad telecommunications product lines: wireless infrastructure;wireline infrastructure and subscriber terminals including handsets and CPE. Wirelessinfrastructure is primarily comprised of the Personal Access System (“PAS”);iPAS; and CDMA products. Wireline infrastructure is primarily comprised of theAN2000, IPDSLAM, and other wireline products. The subscriber terminal productsinclude PAS handsets, CPE and will include CDMA handsets beginning in 2005. Duringthe second quarter of 2004, we experienced 70% growth in net sales over thesecond quarter of 2003. Net sales may not grow at the same rate or may evendecline in the future. With many of our product sales, we provide installationservices. Additionally, we provide maintenance services for some products. Inall periods, total services sales were less than 10% of net sales.

Cost of sales consists primarily of material costs,payments to agents, costs associated with manufacturing, assembly and testingof products, costs associated with installation and customer training andoverhead and warranty costs. Cost of sales also includes import taxes andtariffs on components and assemblies. Some components and materials used in ourproducts are purchased from a single supplier or a limited group of suppliersand, in some cases, are subject to our obtaining Chinese import permits andapprovals. We also rely on third party manufacturers in China to manufactureand assemble the majority of our products.

Our gross profit has been affected by competitivepricing pressure, product mix and material costs. Our gross profit, as apercentage of net sales, varies among our product families. We expect that ouroverall gross profit, as a percentage of net sales, will fluctuate from periodto period as a result of shifts in product mix, anticipated decreases inaverage selling prices from competitive pricing pressure and our ability toreduce cost of sales.

Selling, general and administrative expenses includecompensation and benefits, professional fees, sales commissions, provision fordoubtful accounts receivable and travel and entertainment costs. A largepercentage of our costs are fixed and are difficult to quickly reduce inperiods of reduced sales. We intend to pursue aggressive selling and marketingcampaigns and to expand our direct sales organization, and, as a result, oursales and marketing expenses will increase in absolute dollars in futureperiods. We also expect that in support of our continued growth, general andadministrative expenses will continue to increase in absolute dollars for theforeseeable future.

Research and development expenses consist primarily ofsalaries and related costs of employees engaged in research, design anddevelopment activities, the cost of parts for prototypes, equipmentdepreciation and third party development expenses. A large percentage of ourcosts is fixed and difficult to quickly reduce in periods of reduced sales. Ourresearch and development efforts are focused on developing both next-generationproducts as well as working to upgrade our existing systems and products. Webelieve that continued investment in research and development is critical toour long-term success. Accordingly, we expect that our research and developmentexpenses will increase in absolute dollars in future periods.

Income tax expense isbased upon a blended effective tax rate based upon our expectation of theamount of income to be earned in each tax jurisdiction. The primary drivers forincome tax expense includes both the total amount and location of the incomeearned. The Company uses tax-planning strategies to minimize its income taxexpense. Income tax expense as a percentage of income before taxes willincrease if relatively more income is earned in higher tax environments.

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**THREEAND SIX MONTHS ENDED JUNE 30, 2004 AND 2003**

**NETSALES**
| ** **              | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2004**                                            | ** ** | ** **                                        | ** ** | **2003** | ** ** | ** ** | ** ** | **2004** | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales by region         |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| China                   |       | $                                                   | 618,323    |                                              | 90         | % | $ | 332,548 |   | 82 | % | $ | 1,188,889 |   | 91 | % | $ | 601,478 |   | 82 | % |
| Japan                   |       | 22,104                                              |       | 3                                                 | %          | 60,546 |   | 15 | % | 41,531 |   | 3 | % | 120,366 |   | 16 | % |
| Other                   |       | 49,201                                              |       | 7                                                 | %          | 12,740 |   | 3 | % | 81,499 |   | 6 | % | 14,510 |   | 2 | % |
| TOTAL NET SALES         |       | $                                                   | 689,628    |                                              | 100        | % | $ | 405,834 |   | 100 | % | $ | 1,311,919 |   | 100 | % | $ | 736,354 |   | 100 | % |
| Sales by product  line  |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Wireless infrastructure |       | $                                                   | 427,659    |                                              | 62         | % | $ | 143,490 |   | 35 | % | $ | 764,176 |   | 58 | % | $ | 267,850 |   | 36 | % |
| Subscriber  handsets    |       | 194,313                                             |       | 28                                                | %          | 187,128 |   | 46 | % | 430,733 |   | 33 | % | 327,088 |   | 44 | % |
| Wireline products       |       | 67,656                                              |       | 10                                                | %          | 75,216 |   | 19 | % | 117,010 |   | 9 | % | 141,416 |   | 20 | % |
| TOTAL NET SALES         |       | $                                                   | 689,628    |                                              | 100        | % | $ | 405,834 |   | 100 | % | $ | 1,311,919 |   | 100 | % | $ | 736,354 |   | 100 | % |

 

*Three months ended June 30,2004 and 2003*

In the second quarter of 2004, net sales increased by$283.8 million or 70% over the second quarter of 2003. This increase wasprimarily driven by increases in wireless infrastructure sales of $284.2million. The increase was attributable to increased demand from carriers inChina as a result of the increased number of subscribers. Total PAS subscribersincreased from approximately 20 million at June 30, 2003 to approximately54 million at June 30, 2004. We believe that PAS subscriber growth willcontinue to grow to between 65 and 70 million subscribers by the end of 2004. Wirelessinfrastructure revenues are directly affected by the timing of customer acceptance.In the second quarter of 2004, our customers accepted wireless infrastructureprojects faster than we have historically experienced. This was consistent withour expectation of a quickening pace of the sales cycle for our China customersas they move from initial system implementation to system expansion.

We group all of our Chinacustomers together by province and treat each province as one customer sincethat is the level at which purchasing decisions are made. At June 30, 2004and 2003, we had 30 and 31 such customers, respectively. The Jiangsu and HeiLong Jiang provinces accounted for 15% and 10% of our net sales, respectively,for the three months ended June 30, 2004. The Hei Long Jiang, Zhejiang andHebei provinces accounted for 13%, 11% and 10% of our net sales, respectively,for the three months ended June 30, 2003.

*Six months ended June 30,2004 and 2003*

For the first six months of 2004, net sales increasedby $575.6 million or 78% over the first six months of 2003. This increase insales was primarily attributable to increased demand for our products andservices resulting from an increased number of subscribers. Net sales growthwas primarily due to an increase in subscribers, requiring telecommunicationproviders to expand their telecommunication infrastructures. Wirelessinfrastructure revenues are directly affected by the timing of customeracceptance. In the first half of 2004, our customers accepted wirelessinfrastructure expansion projects faster than we have historically experienced,increasing the percentage of net sales derived from wireless infrastructureproducts that were sold during the six months ended June 30, 2004 than inthe comparative period in 2003.

We group all of our China customers together byprovince and treat each province as one customer since that is the level atwhich purchasing decisions are made. At June 30, 2004 and 2003, we had 30and 31 such customers, respectively. The Guangdong, Jiangsu and Hei Long Jiangprovinces accounted for 16%, 

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11% and 10% of our netsales, respectively, for the six months ended June 30, 2004. The Hei LongJiang province accounted for 13% of our net sales for the six months ended June 30,2003.

The decrease in wireline sales was attributable toseveral factors. Sales of wireline products for the six months ended June 30,2004 were lower than the comparative period in the prior year due to highlevels of wireline product sales in the first half of 2003 due to Japan’sexpansion of its wireline infrastructure base in that period. Some wirelineproduct shipments and customer acceptances were delayed until after the secondquarter due to some supply chain difficulties, thereby reducing the wirelinerevenues recorded during the six months ended June 30, 2004.

Over the second six monthsof 2004, we expect wireless infrastructure revenues to remain consistent withthe first six months. We expect our sales growth for the second six months of2004 to occur principally in our wireline products revenues and secondly in ourhandset revenues.

**GROSS PROFIT**
| ** **              | ** ** | **Three months ended March 31,**                                                                 | ** ** | **Six months ended June 30,**                                                                    | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **         2004         ** | ** ** | **         2003         ** | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| ** **              | ** ** | **(in thousands)**                                                                                              | ** ** | **(in thousands)**                                                                                              | ** ** |
| Gross profit            |       |                                                                                                                 | $          | 176,270                                                                                                              |       |   |   | $ | 137,504 |   |   |   | $ | 352,305 |   |   |   | $ | 250,189 |   |   |
| Gross profit percentage |       |                                                                                                                 | 26         | %                                                                                                                    |       |   | 34 | % |   |   | 27 | % |   |   | 34 | % |   |

 

*Three months ended June 30,2004 and 2003*

Our gross profit variesacross our different product lines and is affected by product mix, averageselling prices and the cost of materials. We attribute the decrease in grossprofit as a percent of net sales for the three months ended June 30, 2004from the corresponding period in 2003 mostly to declining margins on ourhandset products. The declining margins resulted from increased competitivemarket pricing pressures throughout the telecommunications market in the secondquarter of 2004. The declining margins on our handset products were slightlyoffset by the decreased percentage of handset sales, from 46% of net sales forthe second quarter of 2003 to 28% of net sales for the second quarter of 2004.Secondly, the decline in gross profit for the second quarter 2004 as comparedto the second quarter in 2003 was due to a smaller percentage of sales of ourhigher margin wireline products, from 19% of net sales during the secondquarter of 2003 to 10% of net sales for the same period in 2004. In addition tohaving a lower percentage of wireline sales this period, our margins decreaseddue to lower margins on a specific contract upon which revenues were recognizedin this period. This gross margin decline was offset by both higher margins andan increased percentage of our sales from iPAS/PAS systems.

*Six months ended June 30,2004 and 2003*

Our gross profit varies across our different productlines and is affected by product mix, average selling prices and the cost ofmaterials. The decrease in gross profit for the six months ended 2004 ascompared to the same period in 2003 was due to a smaller percentage of sales ofour higher margin wireline products, from 20% of net sales for the six monthsended June 30, 2003 to 9% of net sales for the same period in 2004. Inaddition to having a lower percentage of wireline sales this period, ourmargins decreased due to lower margins on a specific contract upon whichrevenues were recognized in this period. We also attribute the decline in grossprofit as a percent of net sales for the six months ended June 30, 2004from the corresponding period in 2003 to declining margins on our handsetproducts. The declining margins resulted from increased competitive marketpricing pressures throughout the telecommunications market during the firsthalf of 2004. The declining margins on our handset products were slightlyoffset by the decreased percentage of handset sales, from 44% of net sales forthe six months ended June 30, 2003 to 33% of net sales for the same periodin 2004. This gross margin decline was offset by higher margins on our iPAS/PASsystems. Also offsetting declining gross margins was the increased percentageof our sales 

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derived from iPAS/PASsystems, from 36% for the six months ended June 30, 2003 to 58% for thesix months ended June 30, 2004.

We believe that ouroverall gross profit as a percentage of net sales will continue to fluctuatefrom period to period as a result of shifts in product mix, anticipateddecreases in average selling prices as a result of competition and our abilityto reduce cost of sales. We expect that there will be continued competitivemarket pricing pressures on our products in line with current trends in theindustry.

**OPERATING EXPENSES**

The following tablesummarizes our operating expenses:
| ** **                                                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                           | ** ** | ** **                                          | ** ** | **% of net**                            | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** | ** ** | ** ** | **% of net** | ** ** |
| ** **                                                           | ** ** | **2004**                                            | ** ** | **sales**                                         | ** ** | **2003** | ** ** | **sales** | ** ** | **2004** | ** ** | **sales** | ** ** | **2003** | ** ** | **sales** | ** ** |
| ** **                                                           | ** ** | ** **                                          | ** ** | **(in thousands)**                           | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Selling, general  and administrative (“SG&A”) expenses |       | $                                                   | 67,830     |                                              |       | 10 | % |   | $ | 34,963 |   |   | 9 | % |   | $ | 134,773 |   |   | 10 | % |   | $ | 72,546 |   |   | 10 | % |   |
| Reasearch and  development (“R&D”)                     |       | 52,592                                              |       |                                              | 8          | % |   | 36,078 |   |   | 9 | % |   | 98,250 |   |   | 8 | % |   | 62,890 |   |   | 9 | % |   |
| In-process  research and development (“IPR&D”)    |       | 1,400                                               |       |                                              | 0          | % |   | 9,328 |   |   | 2 | % |   | 1,400 |   |   | 0 | % |   | 10,648 |   |   | 1 | % |   |
| Amortization of  intangible assets                                   |       | 3,334                                               |       |                                              | 0          | % |   | 1,483 |   |   | 0 | % |   | 6,307 |   |   | 0 | % |   | 2,178 |   |   | 0 | % |   |
| TOTAL OPERATING EXPENSES                                             |       | $                                                   | 125,156    |                                              |       | 18 | % |   | $ | 81,852 |   |   | 20 | % |   | $ | 240,730 |   |   | 18 | % |   | $ | 148,262 |   |   | 20 | % |   |

 

*SELLING, GENERAL AND ADMINISTRATIVE*

The Company managesselling general and administrative expenses as a percentage of net sales. Inthe current quarter and six months, selling general and administrative expensesremained consistent with prior periods at approximately 10% of net sales.

*Three months ended June 30,2004 and 2003*

The increase of 94% inabsolute dollars in selling, general and administrative expenses was primarilydue to the hiring of additional personnel to support our increased businessactivities both in China and globally. Selling, general and administrativeheadcount increased approximately 41% from an average of 2,088 employees forthe three months ended June 30, 2003 to an average of 2,947 employees forthe three months ended June 30, 2004. Secondly, bad debt expense isgenerally a function of the size of the accounts receivable balance. Grossaccounts receivable increased 100% over June 30, 2003, which resulted inan increase of approximately $10 million in bad debt expense between the secondquarter of 2004 compared to the second quarter of 2003. Finally, the Companyincurred additional professional services fees related to Sarbanes-Oxleycompliance and supply chain management, which resulted in an increase ofapproximately $7.0 million for professional services fees in the second quarterof 2004.

*Six months ended June 30,2004 and 2003*

The increase of 86% inabsolute dollars in selling, general and administrative expenses was primarilydue to the hiring of additional personnel to support our increased businessactivities both in China and globally. Selling, general and administrativeheadcount increased approximately 48% from an average of 

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1,895employees for the six months ended June 30, 2003 to an average of 2,801employees for the six months ended June 30, 2004. Additionally, increasesin professional services fees of $10.7 million and bad debt expense of $8.5million for the first six months of 2004 compared to the first six months of2003 contributed to the increase.

*RESEARCH ANDDEVELOPMENT*

The Company manages research and development expensesas a percentage of net sales. In the current quarter and six months, researchand development expenses decreased compared with prior periods. The decrease ofresearch and development expenses as a percentage of net sales was due toincreased economies of scale associated with increased business levels. Themajority of the new personnel being hired in China, where labor costs are lessexpensive than in the United States, also contributed to the decrease inresearch and development expenses as a percentage of net sales.

We expect research anddevelopment expense to remain constant as a percentage of net sales for thenear future.

*Three months ended June 30,2004 and 2003*

The 46% increase inabsolute dollars of research and development expenses was primarily due tohiring additional technical personnel to support both product enhancements andnew product development. Research and development headcount increasedapproximately 52% from an average of 1,787 employees for the three months endedJune 30, 2003 to an average of 2,719 employees for the three months ended June 30,2004. The significant majority of the increase in research and developmentexpenses from the three months ended June 30, 2003 to the three monthsended June 30, 2004 was attributable to higher payroll and payroll-relatedcosts resulting from our continued expansion of our research and developmentteams in China, from a full quarter’s salaries for CommWorks personnel ascompared to one month’s salaries in the same period in the prior year and fromadditional employees hired in conjunction with the acquisitions of TELOS andHSI.

*Six months ended June 30,2004 and 2003*

The increase in absolute dollarsof research and development expenses of 56% was primarily due to hiringadditional technical personnel to support both product enhancements and newproduct development. Research and development headcount increased approximately57% from an average of 1,591 employees for the six months ended June 30,2003 to an average of 2,492 employees for the six months ended June 30,2004. The significant majority of the increase in research and developmentexpenses from the six months ended June 30, 2003 to the six months ended June 30,2004 was attributable to higher payroll and payroll-related costs resultingfrom our continued expansion of our research and development teams in China,from a full six months of salaries for CommWorks personnel as compared to onemonth’s salaries in the same period in the prior year and from additionalemployees hired in conjunction with the acquisitions of TELOS and HSI.

*IN-PROCESS RESEARCHAND DEVELOPMENT*

*Three months ended June 30,2004 and 2003*

The $1.4 million charge toin-process research and development (“IPR&D”) for the three months ended June 30,2004 was from our acquisition of TELOS. Of the $9.3 million charge to IPR&Dfor the three months ended June 30, 2003, $1.3 million, $6.2 million and$1.9 million were due to the CommWorks, RollingStreams and Xebeo acquisitions,respectively. All charges to IPR&D were based upon independent valuations.

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*Six months ended June 30,2004 and 2003*

The $1.4 million charge toIPR&D for the six months ended June 30, 2004 was from our acquisitionof TELOS. Of the $10.7 million charge to IPR&D for the six months ended June 30,2003, $1.3 million, $6.2 million, $1.9 million and $1.3 million were due to theCommWorks, RollingStreams, Xebeo and Shanghai Yi Yun acquisitions,respectively. All charges to IPR&D were based upon independent valuations.

*AMORTIZATION OFINTANGIBLE ASSETS*

*Three months ended June 30,2004 and 2003*

The increase in theamortization of intangible assets for the three months ended June 30, 2004was due to a full three months of amortization expense associated with the$44.9 million of intangibles recorded upon our May 2003 CommWorksacquisition as compared to one month of expense for the comparative period inthe prior year. Additionally, the increase in amortization of intangible assetsexpense was due to additional amortization expenses related to $20.9 millionand $5.2 million of intangible assets recorded upon our acquisitions of TELOSand HSI, respectively. The estimated useful lives of these purchasedintangibles are from one to ten years.

*Six months ended June 30,2004 and 2003*

The increase in the amortization of intangible assetsfor the six months ended June 30, 2004 was due to a full six months ofamortization expense associated with the $44.9 million of intangibles recordedupon our May 2003 CommWorks acquisition as compared to one month ofexpense for the comparative period in the prior year. Additionally, theincrease in amortization of intangible assets expense was due to additionalamortization expenses related to $20.9 million and $5.2 million of intangibleassets recorded upon our acquisitions of TELOS and HSI, respectively. Theestimated useful lives of these purchased intangibles are from one to tenyears.

We anticipate additionalamortization expense will be incurred in the third and fourth quarters of 2004as the third quarter will include a full three months of amortization relatedto TELOS and HSI and the fourth quarter will include amortization expenserelated to the Audiovox transaction.

**OTHER INCOME (EXPENSES)**

*INTEREST INCOME*

*Three months ended June 30,2004 and 2003*

Interest income was $1.8million and $0.7 million for the three months ended June 30, 2004 and2003, respectively. The increase in interest income was due to higher averagecash balances for the three months ended June 30, 2004 as compared to thecorresponding period in 2003.

*Six months ended June 30,2004 and 2003*

Interest income was $3.2million and $1.6 million for the six months ended June 30, 2004 and 2003,respectively. The increase in interest income was due to higher average cashbalances for the six months ended June 30, 2004 as compared to thecorresponding period in 2003.

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*INTEREST EXPENSE*

*Three months ended June 30,2004 and 2003*

Interest expense was $1.1million and $2.2 million for the three months ended June 30, 2004 and2003, respectively.

*Six months ended June 30,2004 and 2003*

Interest expense was $2.2million and $2.8 million for the six months ended June 30, 2004 and 2003,respectively.

*OTHER INCOME(EXPENSE), NET*

*Three months ended June 30,2004 and 2003*

Net other income was $4.3million and $0.2 million for the three months ended June 30, 2004 and2003, respectively. Net other income for the three months ended June 30, 2004was primarily due to a $2.1 million tax refund received in China. Additionally,we had a currency exchange gain of $0.9 million for the second quarter 2004 ascompared to a currency exchange loss of $2.3 million for the second quarter2003. We also earned a $0.5 million dividend from one of our investments duringthe three months ended June 2004. Net other income for the three monthsended June 30, 2003 was primarily due to a tax refund received in China of$2.6 million.

*Six months ended June 30,2004 and 2003*

Net other income was $13.0million and $4.3 million for the six months ended June 30, 2004 and 2003,respectively. Net other income for the six months ended June 30, 2004 wasprimarily due to our receiving a $7.8 million financial subsidy from the localChinese government during the first quarter of 2004. This subsidy was toencourage our investment in local research and development and manufacturingactivities. We also recorded a currency exchange gain of $0.5 million for thesix months ended 2004 as compared to a currency exchange loss of $1.5 millionfor the six months ended 2003. Additionally, we had a Japanese consumption taxrefund of $1.4 million during the first quarter of 2004. Net other income forthe six months ended June 30, 2003 was primarily due to a $3.9 millionreinvestment incentive payment and a $2.6 million tax refund received inChina.

*EQUITY IN NET LOSSOF AFFILIATED COMPANIES*

*Three months ended June 30,2004 and 2003*

Equity in net loss ofaffiliated companies was $1.2 million and $1.7 million for the three monthsended June 30, 2004 and 2003, respectively, and primarily resulted fromlosses incurred at our joint venture with Matsushita Communication IndustrialCo., Ltd., and Matsushita Electric Industrial Co., Ltd.

*Six months ended June 30,2004 and 2003*

Equity in net loss ofaffiliated companies was $2.2 million and $2.7 million for the six months endedJune 30, 2004 and 2003, respectively, and primarily resulted from lossesincurred at our joint venture with Matsushita Communication IndustrialCo., Ltd., and Matsushita Electric Industrial Co., Ltd.

*INCOME TAX EXPENSE*

*Three months ended June 30,2004 and 2003*

Income tax expense for the three months ended June 30,2003 was previously reported as $13.1 million and has been restated to $9.1million, a decrease of $4.0 million. The decrease in tax expense is due to the 

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correction of the 2003effective tax rate from 25% to 17%. See Note 24 to the consolidated financialstatements.

Income tax expense was$11.0 million and $9.1 million for the three months ended June 30, 2004and 2003, respectively. The primary reason for the increase in income taxexpense was that the overall effective tax rate increased to 20% for 2004 ascompared with 17% in 2003. This increase resulted from a greater proportion ofincome being derived in countries with higher tax rates.

*Six months ended June 30,2004 and 2003*

Income tax expense for the six months ended June 30,2003 was previously reported as $25.6 million and has been restated to $17.7million, a decrease of $7.9 million. The decrease in tax expense is due to thecorrection of the 2003 effective tax rate from 25% to 17%. See Note 24 to theconsolidated financial statements.

Income tax expense was $24.7million and $17.7 million for the six months ended June 30, 2004 and 2003,respectively. The increase in income tax expense was the result of an increasein our income before taxes of 20% for the six months ended June 30, 2004as compared to the corresponding period in 2003, and the overall effective taxrate increased to 20% for 2004 as compared with 17% in 2003. This increaseresulted from a greater proportion of income being derived in countries withhigher tax rates.

**LIQUIDITY AND CAPITAL RESOURCES**

*OperatingActivities*

*2004*

Net cash used in operating activities for the sixmonths ended June 30, 2004 was $118.5 million. Operating cash was affectedby changes in customer advances, inventory and accounts receivable offset bynet income and non-cash charges including depreciation and amortization andchanges in deferred costs and accounts payable.

The $179.1 million increase in accounts receivable wasattributable to a larger volume of sales, from $736.4 million for the sixmonths ended June 30, 2003 to $1.3 billion for the same period in 2004.Also contributing to a larger accounts receivable balance was that we hadlonger collection periods during the six months ended June 30, 2004 ascompared to the same period in the prior year; our days sales outstanding was70 days at June 30, 2004 as compared to 58 days at June 30, 2003. Weproject that our days sales outstanding will fluctuate between 60 and 80 daysfor the remainder of 2004.

Inventory, net of inventory provision, increased by$193.0 million, also decreasing our operating cash. As we expect sales toincrease in subsequent quarters, we continued to build our inventory supply inthis period to meet the anticipated demand in future periods.

The $309.8 million decrease in customer advances alsodecreased operating cash for the period. Customer advances, which representcash deposits we have received from our customers for orders that have not yetreceived final acceptance, decreased due to an increased amount of customeracceptances. As our customers in China transition from new system installationsto system expansions, we believe that the period between customer advance andacceptance will shorten which will result in smaller customer advance balancesfor those customers.

Offsetting the activitythat decreased operating cash for the period were net income and non-cashcharges including depreciation and amortization and changes in deferred costsand accounts payable. Net income was $98.6 million, adjusted for non-cashcharges including $34.0 million of depreciation and amortization. Deferredcosts, or inventory at customer sites awaiting final acceptance, decreased by$223.3 million. The decrease in deferred costs was also a result of increasedrevenues and a greater number of 

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customeracceptances, corresponding to the decrease in customer advances. Accountspayable increased by $136.9 million, consistent with increased inventorypurchasing.

*2003*

Net cash used inoperations for the six months ended June 30, 2003 of $155.9 million wasprimarily due to an increase in inventory, deferred costs, accounts receivableand other current and non-current assets of $254.1 million, $405.9 million,$42.3 million and $121.0 million, respectively. This was partially offset bynet income of $84.6 million, adjusted for non-cash charges includingdepreciation and amortization expense of $17.7 million and in-process researchand development costs of $10.6 million, as well as growth in deferred revenueof $362.2 million, accounts payable of $165.6 million, other current liabilitiesof $26.5 million and customer advances of $9.2 million.

*InvestingActivities*

*2004*

Net cash used in investingactivities for the six months ended June 30, 2004 of $155.7 million wasprimarily due to purchases of property, plant and equipment to support ourexpansion. Of the total $62.5 million invested in property, plant andequipment, construction costs incurred on our Hangzhou manufacturing facilitywere $35.1 million during the period. The Company anticipates a totalinvestment for the Hangzhou facility of $138 million of which an additional $31million is expected to be incurred. Also contributing to net cash used ininvesting activities was our purchases of TELOS and HSI, which resulted in acash outflow of $44.7 million. The Company anticipates that the Audiovoxtransaction will close early in the fourth quarter of 2004 and will require acash payment of $165.1 million at that time. Finally, net purchases ofshort-term investments of $35.3 million contributed to cash used in investmentactivities.

*2003*

Net cash used in investingactivities for the six months ended June 30, 2003 of $42.8 million wasprimarily due to business acquisitions of $109.5 million and purchases ofproperty, plant and equipment of $41.2 million, offset by net sales ofshort-term investments of $113.0 million.

*FinancingActivities*

*2004*

Net cash provided byfinancing activities was $384.7 million for the six months ended June 30,2004. This was primarily due to proceeds raised from our selling 12.1 millionshares of common stock at $39.25 per share to Banc of America Securities, LLC,for net proceeds of approximately $474.6 million. In addition to the sale ofstock, we received $17.7 million for the issuance of common stock through stockoption and warrant exercises. Offsetting cash provided by financing activities,we used a portion of the capital raised to repurchase a total of 3.6 millionshares of our common stock at an average price of $30.25 per share for a totalcost of $107.6 million, including transaction fees.

*2003*

Net cash provided byfinancing activities for the six months ended June 30, 2003 of $243.0million was primarily due to the offering of convertible subordinated notes of$391.4 million and proceeds from the exercise of stock options of $35.0million, offset by the repurchase of shares from Softbank of $139.6 million andpurchases of call options for $43.8 million.

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*Liquidity*

Our working capital was $1.3 billion and$787.5 million at June 30, 2004 and 2003, respectively. This increasein working capital is due to increased cash on hand, to $488.5million in cashand cash equivalents and $77.0 million of short-term investments at June 30,2004, from $276.0 million of cash and cash equivalents and $5.3 million ofshort-term investments at June 30, 2003. Our working capital alsoincreased due to larger accounts receivable balances, offset by lowerinventories and smaller deferred revenues balances. Cash on hand increased dueto remaining proceeds from $474.6 million of net proceeds received from ourequity offering in January 2004. We believe that this cash positionsenables us to take advantage of strategic investment opportunities.

Our China sales are generally denominated in localcurrency. Due to the limitations on converting Renminbi, we are limited in ourability to engage in foreign currency hedging activities in China. Salesoutside China are generally denominated in US dollars. We cannot guarantee thatfluctuations in foreign currency exchange rates in the future will not have amaterial adverse effect on revenues from international sales and,correspondingly, on our business, financial condition and results ofoperations. We have contracts negotiated in Japanese Yen and we maintain a bankaccount in Japanese Yen for purchasing portions of our inventories and supplies.The balance of this Japanese Yen account at June 30, 2004 wasapproximately $36.7 million. Beginning in the first quarter of 2004, wehedge certain Japanese Yen-denominated balance sheet exposures against futuremovements in foreign currency exchange rates by using foreign currency forwardcontracts. Gains and losses on these fair value hedges are intended to offsetgains and losses from the revaluation of our Japanese Yen-denominatedrecognized liabilities. In accordance with Statement of Financial AccountingStandards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments andHedging Activities,” we recognize derivative instruments and hedging activitiesas either assets or liabilities on the balance sheet and measure them at fairvalue. The net result of gains and losses on contracts and revaluation includedin interest and other income (expense) was insignificant for the three and sixmonths ended June 30, 2004. Our foreign currency forward contractsgenerally mature within three months. We do not intend to utilize derivativefinancial instruments for trading purposes. There were no foreign currencyforward contracts held at June 30, 2004.

We believe that our existing cash and cashequivalents, short-term investments and cash from operations will be sufficientto finance our operations through at least the next 12 months. As of June 30,2004, we had cash, restricted cash, short-term investments and restrictedshort-term investments of $608.2 million and lines of credit totaling $566.8million available for future borrowings. $264.8 million of these facilitiesexpire in 2004 and $302.0 million of these facilities expire between 2005 and2010. Of our total cash balance, $177.8 million is held in China where currencyexchange controls exist. As a result, our ability to make payments in otherjurisdictions could be limited by our ability to move money from China to theother jurisdictions.

In the event that ourcurrent cash balances, future cash flows from operations and current lines ofcredit are not sufficient to meet our obligations or strategic needs or in theevent that market conditions are favorable, we would consider raisingadditional funds in the capital or equity markets. If additional financing isneeded, there can be no assurance that such financing will be available to uson commercially reasonable terms, or at all.

*Income taxes*

Our subsidiaries and joint ventures located in Chinaenjoy tax benefits which are generally available to foreign investmententerprises, including full exemption from national enterprise income tax fortwo years starting from the first profit making year and a 50% reduction innational income tax rate for the following three years. In addition, localenterprise income tax is often waived or reduced during this tax holiday/incentiveperiod. Under current regulations in China, foreign investment enterprises thathave 

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been accredited asadvanced and high-tech enterprises are entitled to additional tax incentives.These tax incentives vary in different locales and could include preferentialnational enterprise income tax treatment at 50% of the usual rates fordifferent periods of time. The tax holidays discussed above are applicable toUTStarcom (Chongqing) Co., Ltd. (“CUTS”), UTStarcom Telecom Co., Ltd. (“HUTS”),Hangzhou UTStarcom Telecom Co., Ltd. (“HSTC”) and UTStarcom China Co., Ltd. (“UTSC”),our active subsidiaries in China, as those entities qualify as accreditedadvanced and high-tech enterprises. Specifically, HUTS currently enjoys a 15%tax rate that will continue indefinitely provided they continue to qualifytheir status as an advanced and high-tech enterprise and the Government doesnot change the tax laws. UTSC currently enjoys a 10% holiday tax rate thatexpires on December 31, 2005, at which point they will be subject to a 15%tax rate provided they continue to qualify as an advanced and high-techenterprise and the Government does not change the tax laws. HSTC and CUTS arecurrently exempt from income tax until December 31, 2004, at which pointthey will be subject to a 7.5% tax rate, which will expire on December 31,2007.

We are working toimplement a research and development cost sharing arrangement among our keyworldwide entities. The purpose of cost sharing is to enable its participantsto jointly develop and own intangibles. Under research and development costsharing, the total research and development expense is paid by cost-sharingparticipants in proportion to each participant’s future sales. The benefit isthat there is greater certainty with respect to transfer pricing and definedownership of IP. Cost sharing in China is a new concept and we are workingclosely with the China Tax and Regulatory Authorities to gain approval for costsharing.

*Contractualobligations and other commitments*

Ourobligations under contractual obligations and commercial commitments are asfollows:
| ** **                      | ** ** | **June 30, 2004**               | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Payments Due by Period** | ** ** |
| ** **                      | ** ** | ** **                                | ** ** | ** Less than ** | ** ** | ** ** | ** ** | ** ** | ** ** | **More** | ** ** |
| ** **                      | ** ** | **Total**                                 | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **than 5 years** | ** ** |
| ** **                      | ** ** | **(As Restated)(1)**                 | ** ** | ** ** | ** ** | **(As Restated)(1)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **(in thousands)**                   | ** ** |
| *Contractual Obligations*       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes Payable                   |       |                                      | $          | 1,500 |   |   |   | $ | 1,500 |   |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |
| Convertible  Subordinated Notes |       |                                      | $          | 402,500 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 402,500 |   |   | $ | — |   |   |
| Bank Loan                       |       |                                      | $          | 8,155 |   |   |   | $ | — |   |   |   | $ | 8,155 |   |   | $ | — |   |   | $ | — |   |   |
| Operating leases                |       |                                      | $          | 24,885 |   |   |   | $ | 11,322 |   |   |   | $ | 13,145 |   |   | $ | 418 |   |   | $ | — |   |   |
| *Other Commercial Commitments*  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Standby letters  of credit      |       |                                      | $          | 35,874 |   |   |   | $ | 35,874 |   |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |
| Purchase commitments            |       |                                      | $          | 39,600 |   |   |   | $ | 39,600 |   |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |

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(1)          SeeNote 24 to the condensed consolidated financial statements.

*Notes payable*

Occasionally, the Companyissues short-term notes payable to its vendors in lieu of trade accountspayable. The payment terms are normally three to six months and are typicallynon-interest bearing.

*Convertiblesubordinated notes*

Our $402.5 million ofconvertible subordinated notes, due March 1, 2008, bear interest at a rateof 7¤8%per annum, payable semiannually on May 1 and September 1, areconvertible into the Company’s common stock at a conversion price of $23.79 pershare and are subordinated to all present and future senior debt of theCompany. The principal is due only at maturity of the notes.

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*Bank Loan*

We recorded a bank loan inconnection with a purchase of long-term asset resulting from the consolidationof MDC Holding and its affiliated entities (“MDC”). On January 10, 2003, athird party established a bank loan with Shanghai Pudong Development Bank forthe purchase of the long-term asset. We assumed the obligations of the bankloan and related asset on January 23, 2003, which were subsequentlytransferred to MDC on December 31, 2003. The bank loan of $8.2 millionbears interest at a rate of 4.94% per annum, and expires on January 10,2006. At June 30, 2004, we did not serve as legal obligor for the bankloan.

*Operating leases*

We lease certainfacilities under non-cancelable operating leases that expire at various datesthrough 2008.

*Audiovox purchaseprice payable*

Upon the closing of theAudiovox purchase transaction, which is anticipated during the fourth quarterof 2004, we will be required to pay approximately $165.1 million in cash. Theclosing of the transaction is subject to satisfaction of certain conditionsoutlined in the purchase agreement.

*Standby letters ofcredit*

We issue standby lettersof credit primarily to support international sales activities outside of China.When we submit a bid for a sale, often the potential customer will require thatwe issue a bid bond or a standby letter of credit to demonstrate our commitmentthrough the bid process. In addition, we may be required to issue standbyletters of credit as guarantees for advance customer payments upon contractsigning or performance guarantees. The standby letters of credit usually expiresix to nine months from date of issuance without being drawn by the beneficiarythereof.

*Purchasecommitments*

We are obligated topurchase raw materials and work-in-process inventory under various orders fromthree suppliers, all of which should be fulfilled without adverse consequencesmaterial to our operations or financial condition. As of June 30, 2004,total open commitments under these purchase orders were approximately $39.6million.

*Joint venturefunding*

Pursuant to the jointventure agreement with Matsushita, we are jointly liable for the lossesincurred in the operations of the joint venture up to the maximum of ourinvestment in the entity. At June 30, 2004, the losses had exceeded thisamount; however, we had accrued additional losses of approximately $1.2 millionduring the three months ended June 30, 2004 due to our commitment to fundan additional investment of $9.3 million. We have cumulative losses of $2.2million recorded within other current liabilities.

*Investmentcommitments*

As of June 30, 2004,we had invested a total of $2.0 million in Global Asia Partners L.P. thatis recorded as a long-term investment. The fund size is anticipated to be$10.1 million and the fund was formed to make private equity investmentsin private or pre-IPO technology and telecommunications companies in Asia. Wehave a commitment to invest up to a maximum of $5.0 million. The remaining

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amountis due at such times and in such amounts as shall be specified in one or morefuture capital calls to be issued by the general partner.

*Intellectualproperty*

Certain sales contractsinclude provisions under which customers would be indemnified by us in theevent of, among other things, a third-party claim against the customer forintellectual property rights infringement related to our products. There are nolimitations on the maximum potential future payments under these guarantees. Wehave not accrued any amounts in relation to these provisions as no such claimshave been made and we believe we have valid enforceable rights to theintellectual property embedded in our products.

*Accounts receivabletransferred to notes receivable*

We accept commercial notesreceivable with maturity dates between three and six months from our customersin China in the normal course of business. We may discount these notes withbanking institutions in China. Notes receivable available for sale were $42.9million and $11.4 million at June 30, 2004 and December 31,2003, respectively. A sale of these notes is reflected as a reduction of notesreceivable and the proceeds of the settlement of these notes are included incash flows from operating activities in the consolidated statement of cashflows. There were no notes receivable sold during the three and six monthsended June 30, 2004; there were $25.3 million and $44.5 million of notesreceivable sold during the three and six months ended June 30, 2003,respectively. These notes are not included in our consolidated balance sheetsas the criteria for sale treatment established by SFAS 140, has been met. Thecosts of settling or transferring these notes receivable were $0.3 million and$0.5 million for the three and six months ended June 30, 2003, and wereincluded in other income, net in the Consolidated Statements of Operations.

**RECENT ACCOUNTING PRONOUNCEMENTS**

In November 2003, the EITF issued EITF No. 03-6“Participating Securities and the Two-Class Method under FASBStatement No. 128,” which provides for a two-class method of calculatingearnings per share computations that relate to certain securities that would beconsidered to be participating in conjunction with certain common stock rights.This guidance was applicable to the Company starting with the second quarterbeginning April 1, 2004. We have evaluated the impact of thispronouncement and determined that there was no effect on our financialstatements.

On April 9, 2004, the FASB issued FASB StaffPosition (“FSP”) to SFAS 129-1, Disclosure Requirements under FASBStatement No. 129, Disclosure of Information about Capital Structure,Relating to Contingently Convertible Securities to provide disclosure guidancefor contingently convertible securities, including those instruments withcontingent conversion requirements that have not been met and otherwise are notrequired to be included in the computation of diluted earnings per share. TheFSP addresses concerns that disclosures relating to contingently convertiblesecurities are inconsistent between companies or may be inadequate. FSP SFAS 129-1notes that to comply with the requirements of SFAS 129, the significantterms of the conversion features of the contingently convertible securityshould be disclosed to enable users of financial statements to understand thecircumstances of the contingency and the potential impact of conversion. Wehave evaluated the impact of this pronouncement and have enhanced ourdisclosures as required. For additional information about our outstandingconvertible securities, please refer to Note 14 of our Condensed ConsolidatedFinancial Statements, Debt.

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**FACTORS AFFECTING FUTURE OPERATING RESULTSRISKS RELATED TO OUR COMPANY**

***Our future product sales are unpredictable and, as aresult, our operating results are likely to fluctuate from quarter to quarter.***

Our quarterly andannual operating results have fluctuated in the past and are likely tofluctuate in the future due to a variety of factors, some of which are outsideof our control. Factors that may affect our future operating results, inaddition to those described below, include:

·       thetiming and size of the orders for our products;

·       changesin our customers’ subscriber growth rate;

·       thelengthy and unpredictable sales cycles associated with sales of our products;

·       cancellation,deferment or delay in implementation of large contracts;

·       ourrevenue recognition, which is based on acceptance, is unpredictable;

·       aseasonal reoccurrence of an outbreak of severe acute respiratory syndrome(SARS) or other illnesses affecting areas in which we operate;

·       thedecline in business activity we typically experience during the Chinese LunarNew Year holiday, which leads to decreased sales during our first fiscalquarter relative to historical and expected year-long trends; and

·       changesin accounting rules, such as recording expenses related to employee stock optioncompensation plans.

As a result of these andother factors, period-to-period comparisons of our operating results are notnecessarily meaningful or indicative of future performance. Furthermore, it ispossible that in some future quarters our operating results will fall below theexpectations of securities analysts or investors. If this occurs, the tradingprice of our common stock could decline.

***Competition in our markets may lead to reduced prices,revenues and market share.***

We believe that we willcontinue to face intense competition from both domestic and internationalcompanies in our target markets, many of which may operate under lower coststructures or may be given preferential treatment by applicable governmentalregulators and policies and have much larger sales forces than we do.Additionally, other companies not presently offering competing products mayalso enter our target markets. Many of our competitors have significantlygreater financial, technical, product development, sales, marketing and otherresources than we do. As a result, our competitors may be able to respond morequickly to new or emerging technologies and changes in service providerrequirements. Our competitors may also be able to devote greater resources thanwe can to the development, promotion and sale of new products. Thesecompetitors may be able to offer significant financing arrangements to serviceproviders, which may give them a competitive advantage in selling systems toservice providers with limited financial and currency resources. In many of thedeveloping markets in which we operate or intend to operate, relationships withlocal governmental telecommunications agencies are important to establish andmaintain. In many such markets, our competitors may have or be able toestablish better relationships with local governmental telecommunicationsagencies than we have, which could result in their ability to influencegovernmental policy formation and interpretation to their advantage.Additionally, our competitors might have better relationships with theirthird-party suppliers and obtain component parts at a reduced rate, allowingthem to offer their end products at reduced prices. Increased competition islikely to result in price reductions, reduced gross profit as a percentage ofnet sales and loss of market share, any one of which could materially harm ourbusiness, financial condition, cash flows, and results of operations.

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***The average selling prices of our products maydecrease, which may reduce our revenues and our gross profit. As a result, wemust introduce new products and reduce our costs in order to maintainprofitability.***

The average sellingprices for communications access and switching systems and handsets havehistorically declined as a result of a number of factors, including:

·       increasedcompetition;

·       aggressiveprice reductions by competitors; and

·       rapidtechnological change.

The average selling prices of our products maycontinue to decrease in the future in response to product introductions by usor our competitors or other factors, including price pressures from customers.Therefore, we must continue to develop and introduce new products andenhancements to existing products that incorporate features that can be sold athigher average selling prices. Failure to do so could cause our revenues andgross profit to decline.

Our cost reduction effortsmay not allow us to keep pace with competitive pricing pressures or lead toimproved gross profit, as a percentage of net sales. In order to becompetitive, we must continually reduce the cost of manufacturing our productsthrough design and engineering changes. We may not be successful in theseefforts or in delivering our products to market in a timely manner. Inaddition, any redesign may not result in sufficient cost reductions to allow usto reduce the prices of our products to remain competitive or to improve ormaintain our gross profit, as a percentage of net sales, which would cause ourfinancial results to suffer.

***Sales in China have accounted for most of our totalsales, and our business, financial condition and results of operations are to asignificant degree subject to economic, political and social events in China.***

Approximately $618.3million, or 90%, and $1.2 billion, or 91%, of our net sales for the three andsix months ended June 30, 2004, respectively, occurred in China.Approximately $332.5 million, or 82%, and $601.5 million, or 82%, of our netsales for the three and six months ended June 30, 2003, respectively,occurred in China. While we anticipate expansion into other foreign markets, asignificant majority of our net sales will be derived from China for theforeseeable future. In addition, we plan to continue to make furtherinvestments in China in the future. Therefore, our business, financialcondition and results of operations are to a significant degree subject toeconomic, political, legal and social developments and other events in China.Please read the risks detailed below under the heading “Risks Related toConducting Business in China” for additional information about the risks weface in connection with our China operations.

***Our market is subject to rapid technological change,and to compete effectively, we must continually introduce new products andproduct enhancements that achieve market acceptance.***

The market for communications equipment ischaracterized by rapid technological developments, frequent new productintroductions and evolving industry and regulatory standards. Our success willdepend in large part on our ability to enhance our network and broadband accessand switching technologies and develop and introduce new products and productenhancements that anticipate changing service provider requirements andtechnological developments. We may need to make substantial capitalexpenditures and incur significant research and development costs to developand introduce new products and enhancements. If we fail to develop andintroduce new products or enhancements to existing products that effectivelyrespond to technological change on a timely basis, our business, financialcondition and results of operations could be materially adversely affected.Moreover, from time to time, our competitors or we may announce new products orproduct enhancements, technologies or services that have the potential toreplace or shorten the life cycles of our products and that may cause customersto defer 

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purchasing our existingproducts, resulting in inventory obsolescence. Future technological advances inthe communications industry may diminish or inhibit market acceptance of ourexisting or future products or render our products obsolete.

Even if we are ableto develop and introduce new products, they may not gain market acceptance.Market acceptance of our products will depend on various factors, including:

·       ourability to obtain necessary approvals from regulatory organizations within thecountries in which we operate and for any new technologies that we introduce;

·       thelength of time it takes service providers to evaluate our products, causing thetiming of purchases to be unpredictable;

·       ourproducts being compatible with legacy technologies and standards existing inpreviously deployed network equipment;

·       ourability to attract customers who may have preexisting relationships with our competitors;

·       productcost relative to performance; and

·       thelevel of customer service available to support new products.

If our products fail toobtain market acceptance in a timely manner, our business could suffer.

***We depend on some sole source and other key suppliers,as well as international sources, for handsets, base stations, components andmaterials used in our products. If we cannot obtain adequate supplies of highquality products at competitive prices or in a timely manner from thesesuppliers or sources, our competitive position, reputation and business couldbe harmed.***

We have contracts with a single supplier or with alimited group of suppliers to purchase some components and materials used inour products. If any supplier is unwilling or unable to provide us withhigh-quality components and materials in the quantities required and at thecosts specified by us, we may not be able to find alternative sources onfavorable terms, in a timely manner, or at all. Our inability to obtain or todevelop alternative sources if and as required could result in delays orreductions in manufacturing or product shipments. From time to time, therecould be shortages of different components or materials used in our products.For example, in 2001 and 2002 there was a worldwide shortage of handsetcomponents resulting from our third-party manufacturers’ inability to assembleand manufacture a sufficient quantity of handsets to keep pace with consumerdemand. Moreover, our suppliers may supply us with inferior quality products.If an inferior product supplied by a third party is embedded in our end productand causes a problem, it might be difficult to identify the source of theproblem as being due to the component parts. If any of these events occur, ourcompetitive position, reputation and business could suffer.

Our ability to source asufficient quantity of high-quality, cost-effective components used in ourproducts may also be limited by import restrictions and duties in the foreigncountries in which we manufacture our products. We require a significant numberof imported components to manufacture our products, and imported electroniccomponents and other imported goods used in the operation of our business maybe limited by a variety of permit requirements, approval procedures, importduties and registration requirements. Moreover, import duties on suchcomponents increase the cost of our products and may make them lesscompetitive.

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***If we seek to secure additional financing and are notable to do so, our ability to expand strategically may be limited. If we areable to secure additional financing, our stockholders may experience dilutionof their ownership interest, or we may be subject to limitations on ouroperations and increased leverage.***

We currently anticipatethat our available cash resources, which include existing cash and cashequivalents, short-term investments and cash from operations, will besufficient to meet our anticipated needs for working capital and capitalexpenditures for the foreseeable future. If we are unable to generatesufficient cash flows from operations, we may need to raise additional funds todevelop new or enhanced products, respond to competitive pressures, takeadvantage of acquisition opportunities or raise capital for strategic purposes.If we raise additional funds through the issuance of equity securities, ourstockholders will experience dilution of their ownership interest, and thenewly issued securities may have rights superior to those of common stock. Ifwe raise additional funds by issuing debt, we may be subject to limitations onour operations and increase our leverage. For example, in connection with thesale of convertible debt securities in March 2003, we incurred$402.5 million of indebtedness. As a result of this indebtedness, ourprincipal and interest payment obligations have increased substantially. Thedegree to which we are leveraged could materially and adversely affect ourability to obtain financing for working capital, acquisitions or other purposesand could make us more vulnerable to industry downturns and competitivepressures. Our ability to meet our debt service obligations will be dependentupon our future performance, which will be subject to financial, business andother factors affecting our operations, many of which are beyond our control.Finally, additional sources of financing may not be available on reasonableterms or at all if and when we require it, which could harm our business.

***Our recent growth has strained our resources, and ifwe are unable to manage and sustain our growth, our operating results will benegatively affected.***

We have recentlyexperienced a period of rapid growth and anticipate that we must continue toexpand our operations to address potential market opportunities. Our expansionhas placed and will continue to place a significant strain on our management,operational, financial and other resources. To manage our growth effectively,we will need to take various actions, including:

·       enhancingmanagement information systems and forecasting procedures;

·       furtherdeveloping our operating, administrative, financial and accounting systems andcontrols;

·       managingour working capital and sources of financing to fund our expansion;

·       maintainingclose coordination among our engineering, accounting, finance, marketing, salesand operations organizations;

·       expanding,training and managing our employee base;

·       improvingand sustaining our supply chain capability;

·       managingthe expansion of both our direct and indirect sales channels in acost-efficient and competitive manner; and

·       fullyreview our new customers’ credit histories and ensure their financial stabilitybefore finalizing contracts.

If we fail to implement orimprove systems or controls or to manage any future growth and expansioneffectively, our business could suffer.

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***Our success is dependent on continuing to hire andretain qualified personnel, and if we are not successful in attracting andretaining these personnel, our business will suffer.***

The success of our business depends in significantpart upon the continued contributions of key technical and senior managementpersonnel, many of whom would be difficult to replace. In particular, oursuccess depends in large part on the knowledge, expertise and services of HongLiang Lu, our Chairman of the Board, President and Chief Executive Officer, andYing Wu, our Chairman and Chief Executive Officer of China Operations. The lossof any key employee, the failure of any key employee to perform satisfactorilyin his or her current position or our failure to attract and retain other keytechnical and senior management employees could have a significant negativeimpact on our operations.

To effectively manage our recent growth as well as anyfuture growth, we will need to recruit, train, assimilate, motivate and retainqualified employees both locally and internationally. Competition for qualifiedemployees is intense, and the process of recruiting personnel with thecombination of skills and attributes required to execute our business strategycan be difficult, time-consuming and expensive. As we grow globally, we mustimplement hiring and training processes that are capable of quickly deployingqualified local residents to knowledgeably support our products and services.Alternatively, if there is an insufficient number of qualified local residentsavailable, we might incur substantial costs importing expatriates to servicenew global markets. For example, we have historically experienced difficultyfinding qualified accounting personnel knowledgeable in both U.S. and Chineseaccounting standards who are Chinese residents. If we fail to attract, hire,assimilate or retain qualified personnel, our business would be harmed.

Competitors and othershave in the past, and may in the future, attempt to recruit our employees. Inaddition, companies in the telecommunications industry whose employees acceptpositions with competitors frequently claim that the competitors have engagedin unfair hiring practices. We may be the subject of these types of claims inthe future as we seek to hire qualified personnel. Some of these claims mayresult in material litigation and disruption to our operations. We could incursubstantial costs in defending ourselves against these claims, regardless oftheir merit.

***Any acquisitions that we undertake could be difficultto integrate, disrupt our business, dilute our stockholders and harm ouroperating results.***

We have acquired otherbusinesses, products and technologies. For example, during the secondquarter, we completed our acquisitions of TELOS and HSI for $30.3 million and$14.1 million. Additionally, in June, 2004, we announced our acquisition ofcertain assets of Audiovox for $165.1 million, an acquisition that we expect toclose in the fourth quarter of 2004. Any anticipated benefits of theseacquisitions may not be realized. We have in the past and will continue toevaluate acquisition prospects that would complement our existing productofferings, augment our market coverage, enhance our technological capabilities,or that may otherwise offer growth opportunities. Acquisitions may result indilutive issuances of equity securities, use of our cash resources, theincurrence of debt and the amortization of expenses related to intangibleassets. In addition, acquisitions involve numerous risks, includingdifficulties in the assimilation of operations, technologies, products andpersonnel of the acquired company, diversion of management’s attention fromother business concerns, risks of entering markets in which we have no director limited prior experience, the potential loss of key employees of theacquired company, unanticipated costs and, in the case of the acquisition offinancially troubled businesses, challenges as to the validity of suchacquisitions from third party creditors of such businesses.

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***We may be unable to adequately protect the loss ormisappropriation of our intellectual property, which could substantially harmour business.***

We rely on a combinationof patents, copyrights, trademarks, trade secret laws and contractualobligations to protect our technology. We have applied for patents in theUnited States and internationally. Additional patents may not be issued fromour pending patent applications, and our issued patents may not be upheld. Inaddition, we have, from time to time, chosen to abandon previously filedapplications. Moreover, we may face difficulties in registering our existingtrademarks in new jurisdictions in which we operate. We cannot guarantee thatthe intellectual property protection measures that we have taken will besufficient to prevent misappropriation of our technology or trademarks or thatour competitors will not independently develop technologies that aresubstantially equivalent or superior to ours. In addition, the legal systems ofmany foreign countries do not protect or honor intellectual property rights tothe same extent as the legal system of the United States. For example, inChina, the legal system in general, and the intellectual property regime inparticular, are still in the development stage. It may be very difficult, time-consumingand costly for us to attempt to enforce our intellectual property rights inthese jurisdictions.

***We may be subject to claims that we infringe theintellectual property rights of others, which could substantially harm ourbusiness.***

The industry in which we compete is moving towardsaggressive assertion, licensing, and litigation of patents and otherintellectual property rights. From time to time, we have become aware of thepossibility or have been notified that we may be infringing certain patents orother intellectual property rights of others. Regardless of their merit,responding to such claims could be time consuming, divert management’sattention and resources and cause us to incur significant expenses. Inaddition, although some of our supplier contracts provide for indemnificationfrom the supplier with respect to losses or expenses incurred in connectionwith any infringement claim, some of our contracts do not provide for suchprotection. Moreover, certain of our sales contracts provide that we mustindemnify our customers against claims by third parties for intellectualproperty rights infringement related to our products. There are no limitationson the maximum potential future payments under these guarantees. Therefore, wemay incur substantial costs related to any infringement claim, which maysubstantially harm our results of operations and financial condition.

We may, in the future, become subject to litigation todefend against claimed infringements of the rights of others or to determinethe scope and validity of the proprietary rights of others. Future litigationmay also be necessary to enforce and protect our trade secrets and otherintellectual property rights. Any intellectual property litigation orthreatened intellectual property litigation could be costly, and adversedeterminations or settlements could result in the loss of our proprietaryrights, subject us to significant liabilities, require us to seek licenses fromor pay royalties to third parties which may not be available on commerciallyreasonable terms, if at all, and/or prevent us from manufacturing or sellingour products, which could cause disruptions to our operations.

In the event that there isa successful claim of infringement against us and we fail to developnon-infringing technology or license the propriety rights on commerciallyreasonable terms and conditions, our business, results of operations orfinancial condition could be materially and adversely impacted.

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***Our multinational operations subject us to variouseconomic, political, regulatory and legal risks.***

We market and sellour products globally, with the majority of our sales made in China. Theexpansion of our existing multinational operations and entry into new marketswill require significant management attention and financial resources.Multinational operations are subject to a variety of risks, such as:

·       theburden of complying with a variety of foreign laws and regulations;

·       theburden of complying with United States laws and regulations for foreignoperations, including the Foreign Corrupt Practices Act;

·       difficultycomplying with continually evolving and changing global product andcommunications standards and regulations for both our end products and theircomponent technology;

·       marketacceptance of our new products, including longer product acceptance periods innew markets into which we enter;

·       relianceon local original equipment manufacturers (OEMs), third-party distributors andagents to effectively market and sell our products;

·       unusualcontract terms required by customers in developing markets;

·       changesin local governmental control or influence over our customers;

·       changesto import and export regulations, including quotas, tariffs, licensingrestrictions and other trade barriers;

·       evolvingand unpredictable nature of the economic, regulatory, competitive and politicalenvironments;

·       reducedprotection for intellectual property rights in some countries;

·       longeraccounts receivable collection periods; and

·       difficultiesand costs of staffing and managing multinational operations, including but notlimited to internal control and compliance.

***We do business in markets that are not fullydeveloped, which subjects us to various economic, political, regulatory andlegal risks unique to developing economies.***

Less developedmarkets present additional risks, such as the following:

·       customersthat may be unable to pay for our products in a timely manner or at all;

·       newand unproven markets for our products and the telecommunications services thatour products enable;

·       inconsistentinfrastructure support;

·       lackof a large, highly trained workforce;

·       difficultyin controlling local operations from our headquarters;

·       variableethical standards and an increased potential for fraud;

·       unstablepolitical and economic environments; and

·       alack of a secure environment for our personnel, facilities and equipment.

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In particular, thesefactors create the potential for physical loss of inventory and operatingassets. We have in the past experienced cases of vandalism and armed theft ofour equipment that had been or was being installed in the field. If disruptionsfor any of these reasons become too severe in any particular market, it may becomenecessary for us to terminate contracts and withdraw from that market andsuffer the associated costs and lost revenue.

***We are subject to risks relating to currency ratefluctuations and exchange controls.***

Because most of our sales are made in foreigncountries, we are exposed to market risk for changes in foreign exchange rateson our foreign currency-denominated accounts and notes receivable balances. Wedo not currently hedge our foreign currency-denominated transactions.Historically, the majority of our sales have been made in China and denominatedin Renminbi. The impact of currency fluctuations of Renminbi thus far has beeninsignificant as it is fixed to the U.S. dollar. However, in the future, Chinacould choose to devalue the Renminbi versus the U.S. dollar, or theRenminbi-U.S. dollar exchange rate could float, and the Renminbi coulddepreciate relative to the U.S. dollar. Fluctuations in currency exchange ratesin the future may have a material adverse effect on our results of operations.

We enter into transactions that may expose us toforeign currency rate fluctuation risk. Historically, the largest component ofour foreign currency exchange loss has resulted from our purchasing inventorydenominated in foreign currencies. If we continue to purchase inventory inforeign currencies, we may incur additional foreign currency exchange losses,causing our operating results to suffer.

Moreover, some of theforeign countries in which we do business might impose currency restrictionthat may limit the ability of our subsidiaries and joint ventures in suchcountries to obtain and remit foreign currency necessary for the purchase ofimported components and may limit our ability to obtain and remit foreigncurrency in exchange for foreign earnings. For example, China employs currencycontrols restricting Renminbi conversion, limiting our ability to engage incurrency hedging activities in China. Various foreign exchange controls mayalso make it difficult for us to repatriate earnings, which could have amaterial adverse effect on our ability to conduct business globally.

***Business interruptions could adversely affect ourbusiness.***

Our operations arevulnerable to interruption by fire, earthquake, power loss, telecommunicationsfailure, external interference with our information technology systems,incidents of terrorism and other events beyond our control. For example, ourHangzhou manufacturing facility’s ability to produce sufficient products isdependent upon a continuous power supply, and the power required to source ourmanufacturing operations is inconsistent. The Hangzhou facility has in the pastbeen subject to power shortages, which has affected our ability to produce andship sufficient products. We do not have a detailed disaster recovery plan, andthe occurrence of any events like these that disrupt our business could harmour operating results.

***We may suffer losses with respect to equipment held atcustomer sites, which could harm our business.***

We face the risk of lossrelating to our equipment held at customer sites. In some cases, our equipmentheld at customer sites is under contract, pending final acceptance by thecustomer. We do not hold title or risk of loss on such equipment, as title andrisk of loss are typically transferred to the customer upon delivery of ourequipment. However, we do not recognize revenue and accounts receivable withrespect to the sale of such equipment until we obtain acceptance from thecustomer. If we do not obtain final acceptance, we may not be able to collect thecontract price and recover this equipment or its associated costs. In othercases, particularly in China, where governmental approval is required tofinalize certain contracts, inventory not under contract may be held atcustomer sites. We hold title and risk of loss on this inventory until thecontracts are finalized and, as such, are subject to any losses incurredresulting 

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from anydamage to or loss of this inventory. If our contract negotiations fail or ifthe government of China otherwise delays approving contracts, we may notrecover or receive payment for this inventory. Moreover, our insurance may notcover all losses incurred if our inventory at customer sites not undercontracts is damaged prior to contract finalization. If we incur a loss relatingto inventory for any of the above reasons, our operating results could beharmed.

***We have been named as a defendant in securitieslitigation.***

We and variousunderwriters for our initial public offering are defendants in a purportedshareholder class action. The complaint alleges undisclosed improperunderwriting practices concerning the allocation of IPO shares, in violation ofthe federal securities laws. Similar complaints have been filed concerning theIPOs of more than 300 companies, and the litigation has been coordinated inUnited States District Court for the Southern District of New York as In reInitial Public Offering Securities Litigation, 21 MC 92. Although we believe wehave valid defenses to the claims against us and intend to defend the litigationvigorously, until the matter is resolved, it will be necessary for us tocontinue to expend time and financial resources on the matter. Moreover, anadverse judgment in the litigation could materially harm our operations.

***Standards for compliance with Section 404 of theSarbanes-Oxley Act of 2002 are uncertain, and if we fail to comply in a timelymanner, our business could be harmed and our stock price could decline.***

We must comply with the rules promulgatedunder Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”)by December 31, 2004. Rules describing the requirements for ourauditors to be able to attest to our compliance under Section 404 wereadopted in June, 2004, and we, along with our external service providers, arecurrently interpreting what qualifies as compliance with Section 404.Because the matter of Section 404 compliance is new, there is no precedentor proven method for such compliance, and our management must exercisesignificant judgment in our effort to comply with Section 404. As a resultof this uncertainty, we cannot be certain that we will comply with therequirements of Section 404 in a timely manner. If we fail to comply in atimely manner, public perception of our internal controls could be damaged,causing our financial results to suffer and our stock price to decline.

***Recently enacted and proposed changes in securitieslaws and regulations are likely to increase our costs.***

The Sarbanes-Oxley Act of2002 has required and will continue to require changes in some of our corporategovernance and securities disclosure or compliance practices. That Act alsorequires the SEC to promulgate new rules on a variety of subjects, inaddition to rule proposals already made, and The Nasdaq National Markethas revised its requirements for companies that are Nasdaq-listed. We expectthese developments (i) will require us to devote additional resources toour operational, financial and management information systems procedures andcontrols to ensure our continued compliance with current and future laws andregulations, (ii) will make it more difficult and more expensive for us toobtain director and officer liability insurance, and we may be required toaccept reduced coverage, increase our level of self-insurance, or incursubstantially higher costs to obtain coverage, and (iii) could make itmore difficult for us to attract and retain qualified members of our board ofdirectors, or qualified executive officers. We are presently evaluating andmonitoring regulatory developments and cannot estimate the timing or magnitudeof additional costs we may incur as a result.

***Changes in accounting rules.***

We prepare our financialstatements in conformity with accounting principles generally accepted in theUnited States of America. These principles are subject to interpretation by theSecurities and Exchange Commission and various bodies formed to interpret andcreate appropriate accounting policies. A change in these policies can have asignificant effect on our reported results and may even retroactively 

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affectpreviously reported transactions. In particular, changes to FinancialAccounting Standards Board (FASB) guidelines relating to accounting forstock-based compensation will likely increase our compensation expense, couldmake our net income less predictable in any given reporting period and couldchange the way we compensate our employees or cause other changes in the way weconduct our business.

**RISKS RELATED TO CONDUCTING BUSINESS IN CHINA**

***China’sgovernmental and regulatory reforms may impact our ability to do business inChina.***

The Chinese government, through the Ministry ofInformation Industry, the Chinese telecommunication industry’s regulating body,has broad discretion and authority over all aspects of the telecommunicationsand information technology industry in China, with the power to permit orprohibit the sales of any of our products. Since 1978, the Chinese governmenthas been in a state of evolution and reform. The reforms have resulted in andare expected to continue to result in significant economic and socialdevelopment in China. Many of the reforms are unprecedented or experimental andmay be subject to change or readjustment due to a variety of political,economic and social factors. While we anticipate that the basic principlesunderlying the reforms will remain unchanged, any of the following changes inChina’s political and economic conditions and governmental policies could havea substantial impact on our business: 

·       thepromulgation of new laws and regulations and the interpretation of those lawsand regulations; 

·       inconsistentenforcement and application of the telecommunications industry’s rules andregulations by the Chinese government between foreign and domestic companies; 

·       theintroduction of measures to control inflation or stimulate growth; 

·       theintroduction of new guidelines for tariffs and service rates, which affect ourability to competitively price our products and services; 

·       changesin the rate or method of taxation; 

·       theimposition of additional restrictions on currency conversion and remittancesabroad; or 

·       anyactions which limit our ability to develop, manufacture, import or sell ourproducts in China, or to finance and operate our business in China. 

For example, in the year 2000, the Ministry ofInformation Industry temporarily halted deployment of our PAS systems andhandsets, pending its review of personal handy phone system (“PHS”)-basedtelecommunications equipment, a microcellular wireless communicationstechnology. The Ministry of Information Industry later allowed the continueddeployment of PHS-based systems, such as our PAS systems and handsets, inChina’s county-level cities, towns and villages but limited deployments withinlarge and medium-sized cities to very limited areas of dense population, suchas campuses, commercial buildings and special development zones. If in thefuture the Ministry of Information Industry determines to prohibit the sale ordeployment of our PAS systems and handsets or our other products, or if it imposesadditional limitations on their sale, our business and financial conditioncould suffer. 

In addition to modifyingthe existing telecommunications regulatory framework, the Chinese government iscurrently preparing a draft of a standard, national telecommunications law (the“Telecommunications Law”) to provide a uniform regulatory framework for thetelecommunications industry. We do not yet know the final nature or scope ofthe regulation that would be created if the Telecommunications Law is passed. Accordingly,we cannot predict whether it will have a positive or negative effect on us oron some or all aspects of our business. 

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***China’schanging economic environment may impact our ability to do business in China.***

Since 1978, the Chinesegovernment has been reforming the economic system in China to increase emphasisplaced on decentralization and the utilization of market forces in thedevelopment of China’s economy. These reforms have resulted in significanteconomic growth. However, any economic reform policies or measures in China mayfrom time to time be modified or revised by the Chinese government. While wemay be able to benefit from the effects of some of these policies, thesepolicies and other measures taken by the Chinese government to regulate theeconomy could also have a significant negative impact on economic conditions inChina, which would result in a negative impact on our business. More recently,China’s economic environment has been changing as a result of China’s entryinto the World Trade Organization (WTO), which was effective inDecember of 2001. Entry into the WTO requires that China reduce tariffsand eliminate non-tariff barriers, including quotas, licenses and otherrestrictions, by 2005 at the latest, and we cannot predict the impact of thesechanges on China’s economy. Moreover, although China’s entry into the WTO andthe related relaxation of trade restrictions may lead to increased foreigninvestment, it may also lead to increased competition in China’s markets fromother foreign companies. If China’s entry into the WTO results in increasedcompetition or has a negative impact on China’s economy, our business couldsuffer. In addition, although China is increasingly according foreign companiesand foreign investment enterprises established in China the same rights andprivileges as Chinese domestic companies as a result of its admission into theWTO, special laws, administrative rules and regulations governing foreigncompanies and foreign investment enterprises in China may still place foreigncompanies at a disadvantage in relation to Chinese domestic companies and mayadversely affect our competitive position. 

***Uncertaintieswith respect to the Chinese legal system may adversely affect us.***

We conduct our business inChina primarily through our wholly-owned subsidiaries incorporated in China.Our subsidiaries are generally subject to laws and regulations applicable toforeign investment in China. Accordingly, our business might be affected byChina’s developing legal system. Since 1978, many new laws and regulationscovering general economic matters have been promulgated in China, andgovernment policies and internal rules promulgated by governmental agencies maynot be published in time, or at all. As a result, we may operate our businessin violation of new rules and policies without having any knowledge of theirexistence. In addition, there are uncertainties regarding the interpretationand enforcement of laws, rules and policies in China. The Chinese legal systemis based on written statutes, and prior court decisions have limitedprecedential value. Because many laws and regulations are relatively new andthe Chinese legal system is still evolving, the interpretations of many laws,regulations and rules are not always uniform. Moreover, the relativeinexperience of China’s judiciary in many cases creates additional uncertaintyas to the outcome of any litigation, and the interpretation of statutes andregulations may be subject to government policies reflecting domestic politicalchanges. Finally, enforcement of existing laws or contracts based on existinglaw may be uncertain and sporadic, and it may be difficult to obtain swift andequitable enforcement, or to obtain enforcement of a judgment by a court ofanother jurisdiction. Any litigation in China may be protracted and result insubstantial costs and diversion of resources and management attention. 

***Weonly have trial licenses to sell certain of our network access products inChina.***

Under China’s current regulatory structure, thecommunications products that we offer in China must meet government andindustry standards, and a network access license for the equipment must beobtained. Without a license, telecommunications equipment is not allowed to beconnected to public telecommunications networks or sold in China. Moreover, wemust ensure that the quality of the telecommunications equipment for which wehave obtained a network access license is stable and reliable, and will notlower the quality or performance of other installed licensed products. China’sState Council’s 

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product qualitysupervision department, in concert with China’s Ministry of InformationIndustry, performs spot checks to track and supervise the quality of licensedtelecommunications equipment and publishes the results of such spot checks. 

We have obtained aprobationary network access license for our mSwitch product, and after thetrial period, we anticipate that an official network access license will beissued if the trial demonstrates that mSwitch satisfies all the applicablegovernment and industry standards. However, we cannot be certain that we willreceive this license. Moreover, we only have trial licenses for our PAS systemsand handsets. We have applied for, but have not yet received, a final officialnetwork access license for our PAS systems and handsets. Based uponconversations with China’s Ministry of Information Industry, we understand thatour PAS systems and handsets are considered to still be in the trial period andthat sales of our PAS systems and handsets may continue to be made by us duringthis trial period, but that a license will ultimately be required. If we failto obtain the required licenses, we could be prohibited from making furthersales of the unlicensed products, including our PAS systems and handsets, inChina, which would substantially harm our business, financial condition andresults of operations. The regulations implementing these requirements are notvery detailed, have not been applied by a court and may be interpreted andenforced by regulatory authorities in a number of different ways. Our counselin China has advised us that China’s governmental authorities may interpret orapply the regulations with respect to which licenses are required and theability to sell a product while a product is in the trial period in a mannerthat is inconsistent with the information received by our counsel in China, andeither of these conditions could have a material adverse effect on ourbusiness, financial condition and results of operations. 

***If China Telecom Corporation (“China Telecom”) orChina Netcom International Corporation Ltd. (“China Netcom”) obtains licensesallowing them to deliver mobile services, our ability to sell our PAS mobilesystems and handsets could be impaired.***

China Telecom and China Netcom hold and operate thefixed line telephone and data communications assets in China, and currently donot have the licenses necessary to offer mobile services. However, China’smedia sources have widely reported that China’s Ministry of InformationIndustry may grant mobile licenses to China Telecom or China Netcom, or to bothtoward the end of 2004. Furthermore, it is anticipated that the mobile licensegranted by the government will be used for 3G mobile network deployments. 

If China Telecom or ChinaNetcom obtains 3G mobile licenses, they may direct capital expenditures tobuild-out 3G networks, and capital expenditures to build-out PAS networks thatutilize our existing products may decline. Moreover, they may elect not todeploy our PAS systems and handsets or other mobile services that we may offerin the future. In addition, it is possible that current PAS frequency bandsutilized by PAS networks may be reallocated for use by 3G networks, which wouldhave the effect of restricting or shutting down PAS networks. If this were tooccur, we could lose current and potential future customers for our products,and our financial condition and results of operations could be significantlyharmed. 

***Promotional or incentive programs offered by mobileoperators such as China Mobile and China Unicom may adversely impact thecompetitiveness and pricing of our PAS systems and related products.***

The official tariffs andper-minute usage rates charged to mobile users in China are generally set bythe Ministry of Information Industry and the National Development and ReformCommission, and are usually adhered to by mobile operators. However, from timeto time, certain mobile operators such as China Mobile and China Unicom haveoffered special promotional pricing or incentives to customers, such as freeincoming calls or free mobile-to-mobile calls. The continued use of suchincentive programs by mobile operators may adversely impact the competitivenessand pricing of our PAS systems and related products and their rollout by thenew China Telecom and China Netcom. Such incentive programs may 

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continueor be expanded in the future. We cannot be certain as to what impact suchincentive programs may have on our financial condition. However, it is possiblethat the continuation or expansion of such programs may have a material adverseeffect on our business or results of operations. 

***Iftax benefits available to our subsidiaries located in China are reduced orrepealed, our business could suffer.***

The Chinese government isconsidering the imposition of a “unified” corporate income tax that would phaseout, over time, the preferential tax treatment to which foreign investmententerprises, such as our company, are currently entitled. While it is notcertain whether the government will implement such a unified tax structure orwhether our company will be grandfathered into any new tax structure, if a newtax structure is implemented, a new tax structure may adversely affect ourfinancial condition. Moreover, certain of our subsidiaries and joint ventureslocated in China enjoy tax benefits in China that are generally available to foreigninvestment enterprises. If these tax benefits are reduced or repealed due tochanges in tax laws, our business could suffer. We are currently applying forthe ability to share research and development costs among our key worldwideentities.  This is a new concept in China, and we are working closely withthe China Tax and Regulatory Authorities to gain approval for this costsharing. If the cost sharing is not approved by China, our effective tax ratemay increase. 

**RISKS RELATED TO OUR STOCK PERFORMANCE AND**CONVERTIBLE DEBT SECURITIES 

***Ourstock price is highly volatile.***

The trading priceof our common stock has fluctuated significantly since our initial publicoffering in March of 2000. Our stock price could be subject to widefluctuations in the future in response to many events or factors, includingthose discussed in the preceding risk factors relating to our operations, aswell as: 

·       actualor anticipated fluctuations in operating results, actual or anticipated grossprofit as a percentage of net sales, levels of inventory, our actual oranticipated rate of growth and our actual or anticipated earnings per share; 

·       changesin expectations as to future financial performance or changes in financialestimates or buy/sell recommendations of securities analysts; 

·       changesin governmental regulations or policies in China, such as the temporarysuspension of sales of our PAS systems that occurred in May and June of2000, which caused our stock price to drop; 

·       our,or a competitor’s, announcement of new products, services or technologicalinnovations; 

·       theoperating and stock price performance of other comparable companies; and 

·       newsand commentary emanating from the media, securities analysts or governmentbodies in China relating to us and to the industry in general. 

General market conditions and domestic orinternational macroeconomic factors unrelated to our performance may alsoaffect our stock price. For these reasons, investors should not rely on recenttrends to predict future stock prices or financial results. In addition,following periods of volatility in a company’s securities, securities classaction litigation against a company is sometimes instituted. This type oflitigation could result in substantial costs and the diversion of managementtime and resources. 

In addition, publicannouncements by China Telecom and China Netcom, each of which exertsignificant influence over many of our major customers in China, may contributeto volatility in the price of our stock. In 2002, China Telecom completed itsinitial public offering, which has caused that entity to issue press releasesmore frequently than in prior years. The price of our stock may react to such 

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announcements.More recently, it has been reported that China Netcom has been restructuringits operations for its own initial public offering. More frequent publicannouncements from China Netcom relating to or resulting from their initialpublic offering could cause the price of our stock to become even morevolatile. 

***SOFTBANKCORP. and its related entities, including SOFTBANK America Inc., havesignificant influence over our management and affairs, which it could exerciseagainst your best interests.***

SOFTBANK CORP. andits related entities, including SOFTBANK America Inc. (collectively,“SOFTBANK”), beneficially owned approximately 12.9% of our outstanding stock asof June 30, 2004. As a result, SOFTBANK has the ability to influence allmatters submitted to our stockholders for approval, as well as our managementand affairs. Matters that could require stockholder approval include: 

·       electionand removal of directors; 

·       mergeror consolidation of our company; and 

·       saleof all or substantially all of our assets. 

This concentration ofownership may delay or prevent a change of control or discourage a potentialacquirer from making a tender offer or otherwise attempting to obtain controlof our company, which could decrease the market price of our common stock. 

***Delawarelaw and our charter documents contain provisions that could discourage orprevent a potential takeover, even if the transaction would benefit ourstockholders.***

Other companies mayseek to acquire or merge with us. An acquisition or merger of our company couldresult in benefits to our stockholders, including an increase in the value ofour common stock. Some provisions of our Certificate of Incorporation andBylaws, as well as provisions of Delaware law, may discourage, delay or preventa merger or acquisition that a stockholder may consider favorable. These provisionsinclude: 

·       authorizingthe board of directors to issue additional preferred stock; 

·       prohibitingcumulative voting in the election of directors; 

·       limitingthe persons who may call special meetings of stockholders; 

·       prohibitingstockholder action by written consent; 

·       creatinga classified board of directors pursuant to which our directors are elected forstaggered three year terms; and 

·       establishingadvance notice requirements for nominations for election to the board ofdirectors and for proposing matters that can be acted on by stockholders atstockholder meetings. 

***Theholders of our convertible subordinated notes due in 2008 and we face a varietyof risks related to the notes.***

Holders of ourconvertible subordinated notes due 2008 (the “notes”) and we face a variety ofrisks with respect to the notes, including the following: 

·       wemay be limited in our ability to purchase the notes in the event of a change incontrol, either for cash or stock, which could result in our defaulting on thenotes at the time of the change in control and purchases for stock would besubject to market risk; 

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·       anevent of default under our senior debt, including one of our subsidiaries,could restrict our ability to purchase or pay any or all amounts due on notes,and after paying our senior debt in full, we may not have sufficient assetsremaining to pay any or all amounts due on the notes; 

·       thereis no listed trading market for the notes, which could have a negative impacton the market price of the notes; 

·       wehave significantly increased our leverage as a result of the sale of the noteswhich could have an adverse impact on our ability to obtain additionalfinancing for working capital; 

·       hedgingtransactions related to the notes and our common stock and other transactions,as well as changes in interest rates and our creditworthiness, may affect thevalue of the notes and of our common stock; and 

·       thenotes might not be rated or may receive a lower rating than anticipated byinvestors, ultimately having a negative affect on the price of the notes and ofour common stock. 

**ITEM3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS**

We are exposed to the impact of interest rate changes,changes in foreign currency exchange rates and changes in the stock market. 

*Interest Rate Risk.  *Ourexposure to market risk for changes in interest rates relates primarily to ourinvestment portfolio. The fair value of our investment portfolio would not besignificantly affected by either a 10% increase or decrease in interest ratesdue mainly to the short-term nature of most of our investment portfolio.However, our interest income can be sensitive to changes in the general levelof U.S. interest rates since the majority of our funds are invested ininstruments with maturities less than one year. Our policy is to limit the riskof principal loss and ensure the safety of invested funds by generallyattempting to limit market risk. Funds in excess of current operatingrequirements are mostly invested in government-backed notes, commercial paper,floating rate corporate bonds, fixed income corporate bonds and tax-exemptinstruments. In accordance with our investment policy, all short-terminvestments are invested in “investment grade” rated securities with minimum Aor better ratings. Currently, most of our short-term investments have AA orbetter ratings. 

Thetable below represents carrying amounts and related weighted-average interestrates of our investment portfolio at June 30, 2004:
| ** **                        | ** ** | **(As Restated)(1)**                                 | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                        | ** ** | **(in thousands, except  interest rates)** | ** ** |
| Cash and cash  equivalents        |       |                                                      | $          | 488,540 |   |   |
| Average interest  rate            |       |                                                      | 0.95       | % |   |
| Restricted cash                   |       |                                                      | 15,249     |   |   |
| Average interest  rate            |       |                                                      | 0.51       | % |   |
| Restricted short-term investments |       |                                                      | 27,384     |   |   |
| Average interest  rate            |       |                                                      | 1.04       | % |   |
| Short-term investments            |       |                                                      | 76,979     |   |   |
| Average interest  rate            |       |                                                      | 1.39       | % |   |
| Total investment securities       |       |                                                      | $          | 608,152 |   |   |
| Average interest  rate            |       |                                                      | 1.00       | % |   |

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(1)          See Note 24 to thecondensed consolidated financial statements.

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*Concentration of Credit Risk andMajor Customers:  *The table below outlines our sales to,and the accounts receivable balances with respect to our largest customers: 
| **For the three**              | ** ** | **For the six**                | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|
| **months ended June 30,** | ** ** | **months ended June 30,** | ** ** |
| ** **                               | ** ** | ** **                               | ** ** | **% of** | ** ** | ** ** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                               | ** ** | **% of Net**                   | ** ** | **Accounts** | ** ** | ** ** | ** ** | **% of Net** | ** ** | **Accounts** | ** ** |
| ** **                               | **2004**   | ** **                               | ** ** | **Sales** | ** ** | **Receivable** | ** ** | **2004** | ** ** | **Sales** | ** ** | **Receivable** | ** ** |
| B                                        |       |                                     | 15         | % |   |   | 15 | % |   |   | A |   |   |   | 16 | % |   |   | 9 | % |   |
| C                                        |       |                                     | 10         | % |   |   | 14 | % |   |   | B |   |   |   | 11 | % |   |   | 15 | % |   |
|                                     |       |                                     |       |   |   |   |   |   |   |   | C |   |   |   | 10 | % |   |   | 14 | % |   |
|                                          |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** ** | **2003** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2003** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------|----------|------------|------------|------------|------------|------------|------------|----------|------------|------------|------------|------------|------------|
| C          |     |       | 13         | %          |       |       | 7          | %        |       |       | C          |       |       |   | 13 | % |   |   | 7 | % |   |
| D          |     |       | 11         | %          |       |       | 9          | %        |       |       |       |       |       |   |   |   |   |   |   |   |   |
| E          |     |       | 10         | %          |       |       | 5          | %        |       |       |       |       |       |   |   |   |   |   |   |   |   |

 

The Company extends credit to its customers in Chinagenerally without requiring collateral. In global sales outside of China, theCompany often requires letters of credit from its customers. The Companymonitors its exposure for credit losses and maintains allowances for doubtfulaccounts. 

*Foreign Exchange Rate Risk.  *Weare exposed to foreign currency exchange rate risk because most of our sales inChina are denominated in Renminbi. Due to the limitations on convertingRenminbi, we are limited in our ability to engage in foreign currency hedgingactivities in China.  Beginning in the first quarter of 2004, we hedgecertain Japanese Yen-denominated balance sheet exposures against future movementsin foreign currency exchange rates by using foreign currency forward contracts.Gains and losses on these fair value hedges are intended to offset gains andlosses from the revaluation of our Japanese Yen-denominated recognizedliabilities. In accordance with Statement of Financial Accounting Standards No.133 (“SFAS 133”), “Accounting for Derivative Instruments and HedgingActivities,” we recognize derivative instruments and hedging activities aseither assets or liabilities on the balance sheet and measure them at fairvalue. The net result of gains and losses on contracts and revaluation includedin interest and other income (expense) was insignificant for the three and sixmonths ended June 30, 2004. Our foreign currency forward contractsgenerally mature within three months. We do not intend to utilize derivativefinancial instruments for trading purposes. There were no foreign currencyforward contracts held at June 30, 2004. Movements in currency exchangerates could cause variability in our other income (expense).

Although the impact ofcurrency fluctuations of Renminbi to date has been insignificant, fluctuationsin foreign currency exchange rates in the future may have a material adverseeffect on our results of operations. We maintain a bank account in Japanese Yenfor purchasing portions of our inventories and supplies. The balance of thisJapanese Yen account as of June 30, 2004 was approximately $36.7 million.

**ITEM 4—CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

UTStarcom, Inc. (the “Company”) maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports the Company files or submits under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, and that suchinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),as appropriate, to allow timely decisions regarding required disclosure.

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As of the end of the period covered by the Company’sAnnual Report on Form 10-K for the year ended December 31, 2004(the “2004 Form 10-K”), the Company carried out an evaluation underthe supervision and with the participation of the Company’s management,including the CEO and CFO, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act. Based upon this evaluation, theCEO and CFO concluded that as of June 30, 2004 the Company’s disclosurecontrols and procedures were not effective because of the material weaknessesdescribed under “Management’s Report on Internal Control Over FinancialReporting” in Item 9A of the 2004 Form 10-K. Investors are directedto Item 9A of the 2004 Form 10-K for the description of thesematerial weaknesses.

The Company’s managementbelieves that the consolidated financial statements included in this QuarterlyReport on Form 10-Q fairly present in all material respects theCompany’s financial condition, results of operations and cash flows for theperiods presented and that this Quarterly Report on Form 10-Q doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this report.

**Management’sRemediation Initiatives**

In response to the mattersdiscussed in “Management’s Report on Internal Control Over Financial Reporting”in Item 9A of the 2004 Form 10-K, the Company plans to continue toreview and make necessary changes to the overall design of its controlenvironment, including the roles and responsibilities of each functional groupwithin the organization and reporting structure, as well as policies andprocedures to improve the overall internal control over financial reporting. Inparticular, the Company has implemented and/or plans to implement subsequent toJune 30, 2004 the specific measures described below to remediate the materialweaknesses described in “Management’s Report on Internal Control Over FinancialReporting” in Item 9A of the 2004 Form 10-K.

***Material weaknesses described in item 1 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K***

*RemediationInitiatives.  *The Company’s failure to have a sufficientcomplement of personnel with a level of accounting knowledge, experience andtraining in the application of generally accepted accounting principlescommensurate with the Company’s financial reporting requirements contributed tothe Company’s failure to maintain effective controls over the financialreporting process. To remediate the material weaknesses described in item 1 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K,the Company has implemented or plans to implement the measures described below,and will continue to evaluate and may in the future implement additionalmeasures.

1.      Generalplan for hiring and training of personnel—The Company’s planned remediationmeasures are intended to generally address this material weakness by ensuringthat the Company will have sufficient personnel with knowledge, experience andtraining in the application of generally accepted accounting principlescommensurate with the Company’s financial reporting requirements. Thesemeasures include the following:

(a)           The Company’s chieffinancial officer, with assistance from senior financial staff and outsideconsultants, other than the Company’s independent registered public accountingfirm, has reviewed and will continue to review and adapt the overall design ofthe Company’s financial reporting structure, including the roles andresponsibilities of each functional group within the Company;

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(b)          The Company hiredregional controllers with relevant accounting experience, skills and knowledgefor each of the Asia-Pacific region, the Central America and Latin Americaregion, the Europe, Middle East and Africa region and Japan in late 2004 andearly 2005;

(c)           The Company hired aconsolidation manager in China with relevant accounting experience, skills andknowledge in February 2005;

(d)          The Company hired asenior manager for SEC reporting with relevant accounting experience, skillsand knowledge in February 2005;

(e)           The Company promoted anindividual within the Company with relevant accounting experience, skills andknowledge to become the controller of China operations in April 2005;

(f)             The Company retainedand intends to continue to retain the services of outside consultants, other thanthe Company’s independent registered public accounting firm, with relevantaccounting experience, skills and knowledge, working under the supervision anddirection of the Company’s management, to supplement the Company’s existingaccounting personnel;

(g)           The Company hired avice president of finance for the Company’s China operations with relevantaccounting experience, skills and knowledge in April 2005;

(h)          The Company plans tocontinue to hire, and has allocated resources to hire, additional accountingpersonnel in the U.S., China and Japan, in the areas of tax, external financialreporting, revenue recognition, treasury, financial planning and analysis andcorporate accounting with relevant accounting experience, skills and knowledge;and

(i)             The Company in February 2005implemented an enhanced formal training process for the training of financialstaff and plans to continue this process to ensure that personnel have thenecessary competency, training and supervision for their assigned level ofresponsibility and the nature and complexity of the Company’s business.

2.      RevenueRecognition—The Company’s planned remediation measures are intended to addressmaterial weaknesses related to revenue and deferred revenue accounts andassociated cost of sales. The Company’s planned remediation measures includethe following:

(a)           The Company plans todesign a contract review process in China requiring financial and legal staffto provide input during the contract negotiation process to ensure timelyidentification and accurate accounting treatment of non-standard contracts;

(b)          In March 2005, theCompany conducted a training seminar regarding revenue recognition, includingidentification of non-standard contracts, in the U.S., and, in April 2005,the Company conducted a similar seminar in China. Starting in May 2005,the Company plans to conduct additional training seminars in variousinternational locations regarding revenue recognition and the identification ofnon-standard contracts; and

(c)           At the end of 2004, theCompany began requiring centralized retention of documentation evidencing proofof delivery and final acceptance for revenue recognition purposes.

3.      InventoryManagement—The Company’s planned remediation measures are intended to addressmaterial weaknesses related to inventory, deferred costs, inventory reserveaccounts and cost of sales that have the potential of misstating inventory anddeferred costs and expected recoverability of inventory in future financialperiods. The Company’s planned remediation measures include the following:

(a)           The Company is in theprocess of continuing to upgrade and implement additional Oracle modules tomore effectively track inventory and evaluate deferred costs;

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(b)          The Company implementedin late 2004, and plans to improve during the second quarter of 2005, itsprocess to confirm the existence of off-site inventory by systematicallyobtaining customer confirmations, investigating discrepancies in the confirmedresults, and properly recording and reporting the results of the investigation;

(c)           During the fourthquarter of 2004, the Company initiated a process to accumulate informationnecessary to evaluate inventory and deferred cost contracts for impairment. TheCompany plans to continue to enhance this process in 2005 by bettercoordinating the accumulation of such information from non-U.S. locations;

(d)          The Company plans toimplement in 2005 more robust controls over the release of costs to the incomestatement by better utilizing the Oracle system;

(e)           The Company is in theprocess of selecting a service provider with expertise and systems to moreeffectively manage and track the Company’s inventory in Japan, to whom theCompany plans to outsource this function in 2005; and

(f)             The Company plans todeploy the Oracle system in Japan by the third quarter of 2005.

4.      Accountingfor Goodwill—The Company’s planned remediation measures are intended to addressa material weakness related to the Company’s accounting for goodwill that hasthe potential of misstating goodwill amounts and the impairment of the Company’sgoodwill in future financial periods. The Company’s planned remediationmeasures include the following:

(a)           In the first quarter of2005, the Company implemented a process of reallocating goodwill to the Company’sfive reporting units in a manner reflective of the Company’s new organization;and

(b)          As part of the processdescribed in (a) above, the Company retained an outside consultant,working under the supervision and direction of the Company’s management, to assistin a valuation analysis that was used in the allocation process. The Companyplans to use the consultant on at least an annual basis to assist in avaluation and impairment analysis with respect to goodwill.

5.      ForeignExchange Translations—The Company’s planned remediation measures are intendedto address a material weakness related to the Company’s controls over itsprocesses and procedures related to the translation of its accounts andtransactions denominated in a currency other than U.S. dollars that has thepotential of misstating various accounts in future financial periods. TheCompany’s remediation measures include the implementation in the first quarterof 2005 of an enhanced foreign exchange accounting process utilizing the actualmonth-end exchange rates.

6.      Recordingof Accrued Expenses and Open Purchase Orders—The Company’s planned remediationmeasures are intended to address a material weakness related to the Company’srecording of accrued expenses, primarily in China and Japan, that has thepotential of misstating accrued expenses and related income statement accountsin future financial periods. The Company’s planned remediation measures includethe implementation in the first quarter of 2005 of a process of enhanced reviewof open purchase orders and review of invoices and receipts after the end ofeach quarter to ensure proper recording of accrued expenses and open purchaseorder commitments.

7.      AccuratePreparation and Review of Financial Statements, Reconciliations, JournalEntries and Segment Reporting—The Company’s planned remediation measures areintended to address material weaknesses related to the financial close andreporting process that have the potential of preventing the accuratepreparation and review of the Company’s consolidated financial statements infuture financial periods. The Company’s planned remediation measures includethe following:

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(a)           During the firstquarter of 2005, the Company began to implement, and plans to continue toimprove, new and enhanced procedures to ensure that non-routine transactionsare identified and escalated to senior financial management during the closeprocess to help ensure proper accounting treatment. Specific steps includetraining and ongoing monitoring of financial staff, expansion of the officersub-certifications and active review of contracts by knowledgeable financialand legal staff, from the contract negotiation process through recognition ofrevenue for such contracts;

(b)          During the fourthquarter of 2004, the Company implemented, and plans to continue to enhance, itsmonth-end closing procedures, including reconciliations and controls overspreadsheets, and standardized checklists to ensure such procedures areconsistently and effectively applied throughout the organization; and

(c)           The Company plans toenhance in 2005 the communication and distribution of its accounting policiesand procedures and development of a process to more effectively accumulate andanalyze information required for financial statement footnote disclosures.

8.      IncomeTax Analysis—The Company’s planned remediation measures are intended to addressmaterial weaknesses related to the calculation of its provision for incometaxes that have the potential of misstating the provision for income taxes andrelated balance sheet accounts in future financial periods. The Company’splanned remediation measures include the following:

(a)           The Company plans tohire and train additional experienced tax managers and supporting staff in 2005to closely monitor reporting from China and Japan, to assist in managing auditsand to monitor tax compliance in China and Japan;

(b)          During the first quarterof 2005, the Company utilized outside consultants, other than the Company’sindependent registered public accounting firm, to assist the Company’smanagement, working under its supervision and direction, in its analysis andcalculation of its income tax provision, and the Company plans to continue toutilize outside consultants, other than the Company’s independent registeredpublic accounting firm, to assist the Company’s management, working under itssupervision and direction, in its analysis of such matters in future periods;and

(c)           The Company plans todevelop a comprehensive process to accumulate and organize financial and tax dataused in connection with income tax calculation and reporting.

9.      Utilizationof Automated Controls—The Company’s planned remediation measures are intendedto address a material weakness related to the segregation of duties and useraccess to certain Oracle business process applications that have the potentialof misstating of various accounts in future financial periods. The Company’splanned remediation measures include the following:

(a)           During the firstquarter of 2005, the Company outsourced to a third-party expert the position ofchief security officer to, among other duties, monitor access rights withrespect to the Oracle system and manage ongoing provisioning and changes;

(b)          The Company plans toimprove utilization of current functionality and continue to upgrade and expandfunctionality of the Oracle financial reporting system through utilization ofadditional modules to reduce manual procedures and the utilization ofspreadsheets;

(c)           The Company plans todeploy the Oracle system in Japan by the third quarter of 2005;

(d)          The Company is in theprocess of continuing to upgrade and implement additional Oracle modules tomore effectively track inventory and evaluate deferred costs; and

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(e)           TheCompany plans to implement in 2005 more robust controls over the release ofcosts to the income statement by better utilizing the Oracle system.

***Material weakness described in item 2 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K***

*RemediationInitiatives*.   The Company’s failure to ensure that keymanagement fully understood the nature and potential significance of relatedparties and to ensure that a robust process for the identification of relatedparty transactions contributed to the Company’s failure to maintain effectivecontrols over the identification of and accounting for related partyrelationships and related party transactions with the Company. To remediate thematerial weakness described in item 2 of “Management’s Report on InternalControl Over Financial Reporting” in Item 9A of the 2004 Form 10-K,the Company has implemented or plans to implement the measures described below,and will continue to evaluate and may in the future implement additionalmeasures.

1.      TheCompany conducted an educational seminar with the Company’s key management in March 2005in which the Company’s internal and outside legal counsel and members of theAudit Committee reviewed certain key objectives of the Company’s Code ofConduct, including the identification, recognition and disclosure of relatedparty transactions.

2.      In thefirst quarter of 2005, the Company expanded the number of Company personnelrequired to certify to senior management with respect to identification,recognition and disclosure of related party transactions for SEC reportingpurposes, and revised the Company’s internal certification process concerningidentification, recognition and disclosure of related party transactions.

3.      TheCompany plans to continue to evaluate the Company’s procedures to ensure theidentification, recognition and disclosure of related party transactions.

4.      TheCompany plans to conduct periodic training sessions with key managers andsenior executives regarding the Code of Conduct, including the identification,recognition and disclosure of related party transactions.

5.      The Company plans to provide key managers and senior executiveswith access to legal and accounting personnel to enable such managers andexecutives to more accurately and comprehensively comply with the Company’sinternal certification process for SEC reporting purposes.

***Material weakness described in item 3 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the2004 Form 10-K***

*RemediationInitiatives*.   Lack of clarity in roles and responsibilitiesin certain areas affecting the Company’s financial reporting structurecontributed to a material weakness relating to the monitoring of non-U.S.operations. To remediate this material weakness, described in item 3 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K,the Company has implemented or plans to implement the measures described under “—Materialweaknesses described in item 1 of ‘Management’s Report on Internal Control OverFinancial Reporting’ in Item 9A of the 2004 Form 10-K—RemediationInitiatives and Interim Measures—1. General plan for hiring and training ofpersonnel”, as well as those described below. The Company will continue toevaluate and may in the future implement additional measures.

1.      TheCompany streamlined the reporting structure between all non-U.S. accountingfunctions and the comparable groups in the corporate headquarters, includingtax, treasury and financial 

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planning and analysisgroups, in early 2005 to provide for direct reporting to, and oversight by, theU.S. corporate headquarters.

2.      TheCompany plans to expand the size of the internal audit group and the scope ofthe internal audit group’s responsibilities to monitor non-U.S. operationsthrough reviews and audits of such locations.

3.      TheCompany’s chief financial officer, with assistance from senior financial staffand outside consultants, other than the Company’s independent registered publicaccounting firm, has reviewed and will continue to review and adapt the overalldesign of the Company’s financial reporting structure, including the roles andresponsibilities of each functional group within the Company.

4.      The Company has implemented, and plans to continue to improve,a closing checklist to standardize its procedures for financial review toensure that U.S. reviewers monitor financial information from non-U.S.locations in a consistent manner, through such measures as use of standardizedreporting packages and review procedures.

***Material weakness described in item 4 of “Management’sReport on Internal Control Over Financial Reporting” in Item 9A of the 2004 Form 10-K***

*RemediationInitiatives.  *The Company’s failure to have sufficientpersonnel with knowledge, experience and training in the application ofgenerally accepted accounting principles commensurate with the Company’sfinancial reporting requirements contributed to a material weakness relating tothe Company’s control environment. To remediate this material weakness,described in item 4 of “Management’s Report on Internal Control Over FinancialReporting” in Item 9A of the 2004 Form 10-K, the Company hasimplemented or plans to implement the measures described under “—Materialweaknesses described in item 1 of ‘Management’s Report on Internal Control OverFinancial Reporting’ in Item 9A of the 2004 Form 10-K—RemediationInitiatives and Interim Measures—1. General plan for hiring and training ofpersonnel”, as well as those described below. The Company will continue toevaluate and may in the future implement additional measures.

1.      TheCompany streamlined the reporting structure between all non-U.S. accountingfunctions and the comparable groups in the corporate headquarters, includingtax, treasury and financial planning and analysis groups, in early 2005 toprovide for direct reporting to, and oversight by, the U.S. corporateheadquarters.

2.      TheCompany plans to expand the size of the internal audit group and the scope ofthe internal audit group’s responsibilities to monitor non-U.S. operations throughreviews and audits of such locations.

3.      TheCompany’s chief financial officer, with assistance from senior financial staffand outside consultants, other than the Company’s independent registered publicaccounting firm, has reviewed and will continue to review and adapt the overalldesign of the Company’s financial reporting structure, including the roles andresponsibilities of each functional group within the Company.

4.      The Company has implemented, and plans to continue to improve,a closing checklist to standardize its procedures for financial review toensure that U.S. reviewers monitor financial information from non-U.S.locations in a consistent manner, through such measures as use of standardizedreporting packages and review procedures.

***Control deficiencies not constituting materialweaknesses***

In addition to thematerial weaknesses described in “Management’s Report on Internal Control OverFinancial Reporting” in Item 9A of the 2004 Form 10-K, managementhas identified other deficiencies in 

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internalcontrol over financial reporting that did not constitute material weaknesses asof December 31, 2004. The Company has implemented and/or plans to implementduring 2005 various measures to remediate these control deficiencies and hasundertaken other interim measures to address these control deficiencies.

**Changesin Internal Control over Financial Reporting**

There have been no significant changes in the Company’sinternal control over financial reporting during the quarter ended June 30,2004 that materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting. The discussion aboveunder “Management’s Remediation Initiatives and Interim Measures” describes thematerial planned and actual changes to the Company’s internal control overfinancial reporting subsequent to June 30, 2004 to address the materialweaknesses described in “Management’s Report on Internal Control Over FinancialReporting” in Item 9A of the 2004 Form 10-K.

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**PART II—OTHER INFORMATION**

**ITEM 1—LEGAL PROCEEDINGS**

On October 31, 2001, a complaint was filed inUnited States District Court for the Southern District of New York against us,some of its directors and officers and various underwriters for its initialpublic offering. Substantially similar actions were filed concerning theinitial public offerings for more than 300 different issuers, and the caseswere coordinated as *In re Initial PublicOffering Securities Litigation*, 21 MC 92. In April 2002,a consolidated amended complaint was filed in the matter against us, captioned *In re UTStarcom, Initial Public Offering SecuritiesLitigation*, Civil Action No. 01-CV-9604. Plaintiffs allegeviolations of the Securities Act of 1933 and the Securities Exchange Act of 1934through undisclosed improper underwriting practices concerning the allocationof IPO shares in exchange for excessive brokerage commissions, agreements topurchase shares at higher prices in the aftermarket, and misleading analystreports. Plaintiffs seek unspecified damages on behalf of a purported class ofpurchasers our common stock between March 2, 2000 and December 6,2000. Our directors and officers were dismissed without prejudice pursuant to astipulation. On February 19, 2003, the Court granted in part and denied inpart a motion to dismiss brought by defendants including us. The orderdismissed all claims against us except for a claim brought under Section 11of the Securities Act of 1933, which alleges that our initial public offeringregistration statement contained untrue statements of material fact and omittedto state material facts required to be stated in the registration statement, ornecessary to make the statements therein not misleading.

In June 2004, a stipulation of settlement and releaseof claims against the issuer defendants, including us, was submitted forpreliminary approval by the Court. Under the settlement, the plaintiffs woulddismiss and release all claims against participating defendants in exchange fora contingent payment undertaking by the insurance companies collectivelyresponsible for insuring the issuer defendants in the coordinated action, andthe assignment or surrender to the plaintiffs of certain claims the issuerdefendants may have against the underwriters. Pursuant to the undertaking, theinsurers would be required to pay the amount, if any, by which $1.0 billionexceeds the total amount ultimately collected by the plaintiffs from thenon-settling defendants in the coordinated action. The settlement is subject toa number of conditions including Court approval.

If the settlement does not occur, and litigationagainst UTStarcom continues, we believe it has valid defenses and intends todefend the case vigorously. We are unable to currently estimate the loss, if any,associated with the above litigation.

We have filed a patent infringement suit againstStarent Networks Corporation (“Starent”) in the U.S. District Court for theNorthern District of California. In its Complaint, we assert that Starentinfringes two UTStarcom patents through the manufacture, offer for sale, andsale of Starent’s ST-16 Intelligent Mobile Gateway. On June 3, 2004, weserved our complaint on Starent. On July 30, 2004, Starent filed andserved its answer and counterclaims. In its counterclaims, Starent asserts thatthe patents are not infringed, are invalid, and are unenforceable and assertsunfair competition against us. The Court is scheduled to hold an initial casemanagement conference on October 12, 2004. Although we cannot reliably predictthe outcome of this litigation, it believes that any liability arising fromStarent’s counterclaims will not have a material adverse effect on thebusiness, financial condition, or results of our operations.

We are a party to otherlitigation matters and claims that are normal in the course of our operations,and while the results of such litigation matters and claims cannot be predictedwith certainty, we believe that the final outcome of such matters will not havea material adverse impact on our financial position or results of operations.

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**ITEM2—CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**

(e) Stockrepurchased for the quarter ended June 30, 2004 is as follows:
| ** **                                | ** ** | ** **            | ** ** | ** **              | ** ** | **Total Number of** | ** ** | ** **                         | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | ** **            | ** ** | ** **              | ** ** | **shares**                    | ** ** | **Maximum number**            | ** ** |
| ** **                                | ** ** | ** **            | ** ** | ** **              | ** ** | **purchased as**         | ** ** | **of shares**                 | ** ** |
| ** **                                | ** ** | ** **            | ** ** | ** **              | ** ** | **part of a**       | ** ** | **that may yet be** | ** ** |
| ** **                                | ** ** | **Total Number** | ** ** | **Average**             | ** ** | **publicly**                  | ** ** | **purchased**                      | ** ** |
| ** **                                | ** ** | **of shares**    | ** ** | **purchase price** | ** ** | **announced**                 | ** ** | **under the**                 | ** ** |
| **Period**                                | ** ** | ** **            | ** ** | **purchased(1)**        | ** ** | **per share**            | ** ** | **program(1)**                     | ** ** | **repurchase plan** | ** ** |
| April 1,  2004 - April 30, 2004 |       |                  | 987,566    |                    |       |                          | $          | 29.79                              |       |   |   | 987,566 |   |   |   | 3,067,434 |   |   |
| May 1, 2004  - May 31, 2004     |       |                  | —     |                    |       |                          | —     |                               |       |   | — |   |   |   | 3,067,434 |   |   |
| June 1, 2004  - June 30, 2004   |       |                  | —     |                    |       |                          | —     |                               |       |   | — |   |   |   | 3,067,434 |   |   |
| Total                                     |       |                  | 987,566    |                    |       |                          |       |                               |       |   | 987,566 |   |   |   | 3,067,434 |   |   |
|                                           |            |                       |            |                         |            |                               |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |

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(1)          OnMarch 12, 2004, the Company announced a program to repurchase up to5,000,000 shares of its outstanding common stock over a period of six months,until September, 2004 (the “Repurchase Program”).

**ITEM3—DEFAULTS UPON SENIOR SECURITIES**

[None.]

**ITEM4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

On May 14,2004, the Company held its annual meeting of stockholders. As of March 29, 2004,the record date for the annual meeting, there were 117,198,949 shares of commonstock of the Company issued and outstanding and entitled to vote at the annualmeeting. The following proposals were submitted to a vote of the stockholders:

(i)    To elect the following two Class Imembers currently serving on the Board of Directors to serve until the date onwhich the annual meeting of stockholders is held in the year 2007.
| **Election of Directors** | ** ** | ** ** | ** ** | **Votes for** | ** ** | **Votes Withheld** | ** ** |
|-------------------------------------|------------|------------|------------|--------------------|------------|-------------------------|------------|
| Thomas J. Toy                       |       | 97,292,989 |       |               | 1,806,649  |                    |       |
| Ying Wu                             |       | 84,582,857 |       |               | 14,516,781 |                    |       |

 

As a result, Messrs. Toyand Wu were elected as Directors of the Company.

(ii)   To ratify and approve the appointment ofPricewaterhouseCoopers LLP as the independent public accountants of the Companyfor the fiscal year ending December 31, 2004
| **For**    | ** ** | ** ** | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-votes** | ** ** |
|------------|------------|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 97,242,212 |       | 1,775,213  |       | 82,213      |       |        | —     |                      |       |
|            |            |            |            |             |            |             |            |                           |            |  |  |

 

**ITEM 5—OTHER INFOR**MATION

Our directors, officers,or employees have entered, and may from time to time enter, into good faithtrading plans pursuant to SEC Rule 10b5-1(c).

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**ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K**

(a)   Exhibits:
| NUMBER    | ** **                                                                                                                                                                                                                                                     | ** ** | **EXHIBIT DESCRIPTION** |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|
| 10.100(1) | Asset Purchase Agreement  among UTStarcom , Inc., Telos Technology, Inc., Telos Technology  (Canada), Inc., Telos Technology (Bermuda) Ltd. and Telos Engineering  Limited dated April 21, 2004                                       |
| 10.101(1) | Asset Purchase Agreement by and among Audiovox  Communications Corp., Quintex Mobile Communications Corporation, Audiovox  Communications Canada Co., UTStarcom, Inc., UTStarcom Canada Company and  Audiovox Corporation, dated as of June 11, 2004 |
| 31.1      | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                  |
| 31.2      | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                  |
| 32.1      | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                             |

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(1)   Previouslyfiled with the registrant’s Quarterly Reporting on Form 10-Q for the quarterended June 30, 2004, as filed with the Securities and Exchange Commissionon August 16, 2004.

(b)   Reports on Form 8-K:

1.     Report on Form 8-Kdated on April 22, 2004 (filed on April 23, 2004) under Item 5,relating to the Company’s press release entitled “UTStarcom Agrees to AcquireTELOS Technology, Leading Provider of Industry-Proven Packet Core Networks forCDMA 2000.”

2.     Report on Form 8-Kdated and filed on April 27, 2004 under Item 5 and Item 7, relating to theCompany announcing its results of operation for the first quarter of 2004.

3.     Report on Form 8-Kdated and filed on June 14, 2004 under Item 5 and Item 7, relating to theCompany’s press release entitled “UTStarcom Agrees to Acquire Select Assets ofAudiovox Handset Division for $165.1 Million.”

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                               | UTSTARCOM,  INC. |
|-------------------------------|------------------|
| Date: June 3, 2005       | By:              | /s/ HONG LIANG  LU |
|                          |             | Hong Liang Lu |
| * *                      |             | *President, Chief Executive Officer and Director* |
| * *                      |             | *(Principal Executive Officer)* |
| Date: June 3,  2005 | By:              | /s/  MICHAEL J. SOPHIE |
|                          |             | Michael J. Sophie |
| * *                      |             | *Executive Vice President, Chief Operating  Officer, and Acting Chief Financial Officer* |
| * *                      |             | *(Principal Financial Officer)* |

 

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**UTSTARCOM, INC.**

**EXHIBIT INDEX**
| NUMBER    | ** **                                                                                                                                                                                                                                                      | ** ** | **EXHIBIT DESCRIPTION** |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|
| 10.100(1) | Asset Purchase Agreement among UTStarcom  , Inc., Telos Technology, Inc., Telos Technology  (Canada), Inc., Telos Technology (Bermuda) Ltd. and Telos Engineering Limited  dated April 21, 2004                                             |
| 10.101(1) | Asset Purchase Agreement  by and among Audiovox Communications Corp., Quintex Mobile Communications  Corporation, Audiovox Communications Canada Co., UTStarcom, Inc.,  UTStarcom Canada Company and Audiovox Corporation, dated as of June 11,  2004 |
| 31.1      | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |
| 31.2      | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                   |
| 32.1      | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                              |

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(1)   Previously filed with the registrant’s Quarterly Report on Form10-Q for the quarter ended June 30, 2004, as filed with the Securities andExchange Commission on August 16, 2004.

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